By Major General Stephen J. Lepper, USAF (retired) – President & CEO, American Military Banks of America & Colonel Anthony R. Hernandez, USAF (retired) – President & CEO, Defense Credit Union Council
Published in American Banker on December 21, 2022
The lame-duck Senate recently considered and rejected an amendment to the 2023 National Defense Authorization Act that could have inflicted unintended financial harm on our nation’s military families. That amendment is the Credit Card Competition Act of 2022.
Why was it an amendment to the NDAA? Because its sponsors, Sens. Dick Durbin and Roger Marshall, know the only way their proposal will become law is if it’s attached to the only legislation that must pass before the end of this Congress. Since it didn’t pass as part of the NDAA, its sponsors are now looking for other “must-pass” legislation. Last-minute funding bills — continuing resolutions or omnibus appropriations bills — will be their most likely targets.
Americans generally, and military families in particular, should be concerned about this proposal because it’s a wolf in sheep’s clothing. Beneath its promise to lower consumer costs by increasing competition among credit card payment networks lies the significant risk that not only will Americans not see a penny of lower prices, but they will instead see higher credit interest rates, lower credit availability, or both.
In a nutshell, the CCCA would require the largest U.S. credit card issuers (banks and credit unions) to allow at least two unaffiliated payment networks to process their credit card transactions. Only one of those networks can be Visa or Mastercard.
The driving force behind this proposal is the merchant lobby, whose members believe increased competition will decrease their credit card processing fees. It’s particularly ironic that among the biggest proponents of this push for credit card competition are big grocery chains that are enjoying record profits but not enjoying the congressional scrutiny they’ve attracted for their industry’s consolidation and persistently high prices. The decreased card processing fees, they say, will be passed on to consumers in the form of lower prices.
Banks and credit unions dispute this, of course, and point to similar debit card “reform” efforts under Dodd-Frank’s Durbin amendment as proof of this new proposal’s empty promises. Under “debit card Durbin,” debit card issuers must allow at least two payment processors to route all debit transactions. Then, as now, the merchant lobby argued that the resulting increased competition would lower costs for consumers.
Unfortunately, big-box retailers and e-commerce giants prevented this from happening. According to a 2014 Federal Reserve Bank of Richmond survey, the promised consumer savings never materialized. In fact, the survey found that, rather than passing the savings on to consumers, a large number of merchants raised their prices or imposed restrictions on debit card use to avoid paying debit interchange fees.
Given “debit card Durbin’s” failure to achieve promised consumer savings, no one should wonder why banks and credit unions argue that the only beneficiaries of that Durbin amendment — merchants — will also be the only beneficiaries of the CCCA.
In October, the Association of Military Banks of America and the Defense Credit Union Council signed a joint-trades letter to Congress opposing the CCCA. Although the potential damage the CCCA would inflict on our military bank and defense credit union members would be significant, our more compelling motivation was the potential contraction of credit availability our nation’s military families could suffer if this proposal becomes law.
Because the CCCA’s proponents tried and failed to use the NDAA as their legislative vehicle, it’s only appropriate that its potential impact on the military community should be considered.
Since the enactment of the Military Lending Act, it has become difficult for banks and credit unions to extend small-dollar, short-term loans to our troops and their families. Although the MLA has helped reduce predatory lending to military families, it has also elevated credit cards as one of the few remaining sources of safe, open-ended credit available to bridge gaps between military paydays.
Just as the MLA unintentionally curtailed military small-dollar lending, we fear the CCCA will do the same for military credit card availability. We believe the CCCA will create a domino effect whereby credit card interchange is reduced, leading to bank efforts to reduce credit risk by tightening creditworthiness standards, leading to the exclusion of many Americans (particularly junior service members) whose creditworthiness may lie on the razor’s edge. In short, if there’s anything that will likely force our service members back into the arms of payday lenders, this legislation may be it.
Battle lines have been drawn between merchants and credit card issuers over the Credit Card Competition Act. AMBA and DCUC are focused, first and foremost, on the potential financial harm the CCCA will inflict on military families. The CCCA is a proposal that should not, under any circumstances, become law until its potential effects — good or bad — are fully understood.