More credit card competition? Not really

Sen. Dick Durbin (D-IL) is worried about a lack of competition in payment card networks, so he’s planning to force the issue. His Credit Card Competition Act aims to reduce process by mandating that large banks offer merchants a choice of payment networks when the customer presents a card for payment – and one of those choices has to be something other than Visa or Mastercard.

Sounds good, right? Who isn’t in favor of more competition? We here at the Competitive Enterprise Institute certainly are. But Durbin’s scheme isn’t real competition, as I explain in a new video.

Visa and Mastercard have earned their market position by consistently winning out on quality for the banks that provide credit and debit cards. They have by far the best security of any networks, which is why you and I don’t have to worry routinely about bad actors gaining access to our payment cards, and when they do, the networks pay for things to be made right. These things all happen behind the scenes.

Mandating that a competitor has to be offered might be okay if you or I were making the choice, but we won’t have that ability. It’s the merchant that makes the choice – and merchants, especially the really big merchants, have been bridling at the prices banks and networks charge them for decades.

New competitors of course won’t be able to compete with the big networks on quality/security, so they will compete primarily on price. Which do you think the merchants will choose? Expect more breaches in your card security if this bill becomes law.

Moreover, if the banks lose revenue as a result of this change, the first thing that will go are the rewards programs that so many consumers love. We know this because that’s what happened the last time Dick Durbin got his way on this; after his amendment to the Dodd-Frank Act capped fees on debit cards, debit card rewards programs disappeared.

That’ll just be the start of it. There are basically three ways for banks to make money from credit cards – network fees, consumer fees, and interest rates. Interest rates are already sky high, so if network fees are capped, expect higher annual fees for your cards.

Finally, if the rewards programs dry up, banks won’t be buying as many air miles from airlines. So, the airlines will respond (air miles sales make up a staggering 20 percent of airline revenue – that’s how much consumers love them). Expect fewer flights, more cramped legroom, and higher air fares.

That’s quite an array of predictable consequences as a result of this bill.

It’s all the more regrettable when there is the chance of a new competitor arising, if regulators allow the merger of Capital One and Discover, that could compete on quality and price (and still deliver rewards programs that the banks are famous for). As I say at the end of the video, in a free market competition arises naturally; it should never be forced.