COMMENTARY: A Dose of Reality on the Broken Credit Card Market

Eric Cohen’s Commentary, “Whey the Credit Card Competition Act Falls Short,” posted here Oct. 9, makes three key claims about how the Credit Card Competition Act would supposedly harm small businesses and consumers. All of them are wrong.

First, he says the bill would allow merchants “to choose their own network” and argues that “the merchant isn’t likely to know which is right for them.” The CCCA does not allow merchants to choose their own network. Instead, it requires the nation’s largest banks to enable at least two unaffiliated networks on each credit card—Visa or Mastercard plus a competitor like NYCE, Star, or Shazam.

The choice of which two networks to enable would be entirely up to the card-issuing bank, not the merchant. Merchants would then get to choose which of the two networks to use, creating competition over fees, service, and security that is expected to save them and their customers $15 billion a year.

The same requirements already exist for debit cards, where the merchant part of that choice is usually exercised by merchants’ processors. Exactly the same would happen with credit cards. Small businesses get major advantages from working with their processors today, and that would continue.

Mr. Cohen should also know that small businesses would be the biggest beneficiaries because they pay the highest swipe fees on credit cards right now. They need reform even more desperately than large businesses do.

Secondly, he claims that there is a “major risk of increased fraud” with the competing networks. That’s simply not true. The competing networks are not startups or newcomers. They are the same networks the banks themselves have trusted for decades to safely and efficiently process billions of dollars in ATM and debit card transactions each day. The Federal Reserve says those competing networks have one-fifth the rate of fraud of Visa and Mastercard’s networks.

If we just replaced Visa and Mastercard with their competitors today, fraud would be reduced—by a lot. And, making networks compete on security, which the legislation would do, will make everyone improve security to reduce total fraud.

Finally, he says “It is unclear whether cheaper networks will offer the same level of rewards to customers.” That statement misunderstands how rewards work. Credit card rewards are determined by the bank that issues a card, not the network that processes the transaction. Rewards are banks’ top marketing tool in convincing consumers to choose a credit card from one bank rather than another.

Banks would see less revenue under the CCCA. But a study by globally recognized payments consulting firm CMSPI found that the revenue loss would result in a reduction of rewards of less than 1/10^th of 1% “at most,” and that banks’ swipe-fee profits provide “more than sufficient margin” to make up the difference and “maintain current reward levels.” Verify.com, CNET, and WalletHub have all agreed that there would still be plenty of rewards.

Mr. Cohen’s business, Merchant Advocate, is a consulting firm that promises to “help merchants save money from the unregulated credit card industry.” He argues that, rather than passing the CCCA, the better solution for small businesses is “working with an expert who can help decipher these confusing statements” from credit card companies. Is it just coincidence that a credit card processing consultant is touting the services of “experts” like himself rather than supporting legislation to solve the problem?

All in all, Mr. Cohen’s post is not a serious attempt to address public policy.

—Doug Kantor is general counsel at the National Association of Convenience Stores and a member of the Merchants Payments Coalition executive committee.