Eric Cohen asked some interesting questions in his recent op-ed on the Credit Card Competition Act, which would bring billions of dollars in savings to small businesses and consumers by allowing major credit card transactions to be processed over a competing network rather than just market-dominating Visa or Mastercard. Unfortunately, he got all of the answers wrong.
To start, he asked, “will a cheaper network have the same fraud protection?” The answer is no, but not because of the reduced security Mr. Cohen implies. The competing networks actually offer better security. Rather than startups or newcomers, the networks that would be given a chance are companies with long track records like NYCE, Star and Shazam, which the banks themselves have trusted for decades to safely process billions of dollars in ATM and debit card transactions. In fact, the Federal Reserve says these networks have one-fifth the fraud rate of Visa and Mastercard’s networks. And making networks compete on security would make everyone work to reduce total fraud.
Mr. Cohen also asked, “if a less expensive network is used, will the card user be given fewer rewards or no rewards at all?” Again, the answer is no. To start, rewards are determined by the bank that issues a card, not the network that processes the transaction. Moreover, rewards are banks’ top marketing tool in convincing consumers to choose a credit card from one bank rather than another. It’s not Visa or Mastercard who give consumers rewards. Banks — which do give rewards — would see less revenue under the CCCA, as Mr. Cohen says. But a study by globally recognized payments consulting firm CMSPI found that the revenue loss would reduce rewards by less than one-tenth 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 also questioned whether consumers save when businesses cut expenses. I can’t speak for Mr. Cohen’s business, but retail is the most competitive sector of the nation’s economy and routinely passes cost savings along to customers — if one store didn’t, it would lose business to the one across the street that did. When debit card swipe fees were reduced a dozen years ago, esteemed economist Robert Shapiro found that 70% of the savings was shared with consumers. The Federal Reserve found after reform that 75% of merchants surveyed had avoided price increases that otherwise would have taken place. And government data shows consumer prices rose half as much as wholesale prices for five years after reform — further evidence that merchants used swipe-fee savings to hold down prices.
He also repeats Visa’s misleading claim that it cut swipe fees for 90% of U.S. businesses in 2022. Visa did reduce some specific rates, but the reduction applied only to businesses with under $250,000 a year in volume on Visa consumer credit cards — and only if they knew about it and asked the right person at Visa, which most didn’t. The 90% is simply a fantasy number invented for public relations purposes, and it came as Visa and Mastercard imposed $1.2 billion in increases.
Mr. Cohen acknowledges that high swipe fees are “a pain point” that “needs to be addressed.” So why would he cast doubt on this bill? His business, Merchant Advocate, is a consulting firm with a website that promises to “help merchants save money from the unregulated credit card industry.” He argues that “using an expert” to navigate the current system is the answer.
The correct answer, however, isn’t to perpetuate a system that is so complex and unfair that small businesses need the services of an expert. The answer is to pass legislation that fixes the broken credit card market by requiring big banks and giant card networks to compete the same way small businesses do every day.