Report Finds Credit Card Competition Act Would Harm Community Banks

A new report warns that legislation aimed at lowering credit card interchange fees could cut revenue for community banks and reduce access to credit for low-income households.

The Credit Card Competition Act (CCCA) seeks to enhance competition by requiring credit cards to support multiple payment networks, forcing major players like Visa and Mastercard to compete on fees and service.

However, a report by Indraneel Chakraborty, chair of the department of finance at the University of Miami, found that the legislation would give the largest merchants significantly more leverage in fee negotiations, which would harm community banks and distort the market.

Smaller lenders could lose money on each transaction, which would threaten their viability and thereby impact access to credit in underserved communities, according to the report.

At the same time, several states have proposed to exempt sales taxes and tips from interchange fees on credit cards. The report states that the effect of this legislation would be similar to that of the CCCA, as smaller financial institutions would see their interchange revenue reduced significantly.

The report estimates community banks and credit unions could lose nearly $1.6 billion a year if the exemption is implemented nationwide. This represents 15% of the projected $10.5 billion drop in total revenue, based on their share of the consumer lending market.

The CCCA has received criticism since it was first introduced, with the American Bankers Association and Independent Community Bankers of America claiming that the “deeply flawed and harmful” legislation would threaten privacy and data security.

Ten other financial services trade bodies also argued that the act would compromise security and places artificial price caps on the interchange fee that merchants pay to defray costs associated with data breaches, which would hurt consumers.