Research Note: Imposing Alternative Payment Networks on Credit Cards Will Likely Hurt Low Income Households and Small Merchants

Abstract

The intent of the proposed Credit Card Competition Act (CCCA) is to reduce routing fees for credit card transactions to save merchants--and hence consumers--money. However, this analysis suggests that almost all of those savings will accrue to retailers with $500 million or more in annual sales, with little going to small businesses. I estimate that the largest U.S. retailers would effectively receive a transfer of approximately $2.9 billion from issuers and cardholders impacted by the legislation. But small businesses would save significantly less, if anything, putting small retailers at a further competitive disadvantage than is currently the case. Further, small business operators receive roughly $12 billion in credit card rewards when they make purchases on credit themselves, which constitutes roughly one-tenth of all credit card rewards. The CCCA would result in the reduction of such programs, costing small businesses over $1 billion in lost rewards as well as a decline in access to credit. This would further diminish their ability to compete with larger businesses.

Keywords: Alternative Payment Networks, Credit Cards

JEL Classification: K21