NEW STUDY: Credit Card Mandates Would Harm Small Businesses

By at 11 February, 2024, 3:49 pm

by Raymond J. Keating –

A new study confirms that the Credit Card Competition Act, which would impose routing mandates for credit card transactions, would inflict harm on small businesses.

SBE Council has warned: “The mandates would drive billions of dollars from the credit market and force financial institutions to reduce crucial lending to entrepreneurs and their businesses in need. Additionally, credit card routing mandates would strip small businesses of valuable services, like fraud prevention, that they rely on to protect their business and customers.”

The new study (titled “Imposing Alternative Payment Networks on Credit Cards Will Likely Hurt Low Income Households and Small Merchants”) by Indraneel Chakraborty, chair of the finance department at the University of Miami Herbert Business School, confirms this assessment.

Regulation Has Unintended Consequences

The author opens with a fundamental point about politics overriding economics: “Policymakers often seek to regulate various markets to produce the outcomes they desire without considering why their preferred outcome is not, in fact, the market equilibrium.” The result? “While the bill’s supporters contend it will reduce credit card processing fees and that these savings will accrue to consumers, this is unlikely to occur. Instead, the biggest impact for many consumers and SMEs will be the demise of their credit card rewards programs, and a reduction in the availability of credit.”

Chakrabooty continues a bit later: “The CCCA implicitly recognizes the additional costs that would be incurred from the new routing mandate, and it attempts to reduce it by only requiring the largest banks to add an alternative payment network. The impractical hope of policymakers is that large banks and payment networks will acquiesce to bearing the additional costs without raising prices elsewhere to reflect higher operating costs. But wishing will not make it so, and much of the costs of mandating an alternative payment network will ultimately be borne by SMEs [small businesses] and at-risk consumers.”

“Transfers” Put Small Businesses at “an Even Steeper Disadvantage”

Specifically, the author concludes: “On its face, mandating a second network to lower fees might sound pro-competitive, and it will undoubtedly lower credit card fees, but almost all of the CCCA transfers will accrue to the largest merchants, placing SMEs at an even steeper competitive disadvantage. Equally concerning is that SMEs will also suffer from reduced access to credit as financial institutions lose revenue and possibly more than $1 billion in their own SME rewards. The main impact on consumers would be reduced access to credit and diminished credit card rewards.”

Politics often falls prey to what sounds nice, no matter how detached the political undertaking might be from actual economics and real consequences. After all, the shortsightedness effect often dominates whereby politicians have an incentive to support programs that offer immediate benefits, or at least the appearance of benefits, while the costs either are ignored, hidden or pushed off into the future.

The Credit Card Competition Act is rooted in wishful thinking, cynical politics, or both. Sound economic reasoning makes that clear.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest books on the economy are The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist and The Weekly Economist II: 52 More Quick Reads to Help You Think Like an Economist.


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