Americans dislike all the credit card “tricks and traps” that might lure them into thinking they will get something for nothing, but they like their rewards points. This summer, families used these credits to travel to destinations nationwide while finding places to stay. Given that the Asian American Hotel Owners Association’s 20,000 members own 60 percent of U.S. hotels, we know a thing or two about the rewards points system.
That is why it is frustrating to see American consumers being misled on this credit card reform issue. One ad claims that the proposed federal legislation, the Credit Card Competition Act, would, according to another, “kill credit card rewards programs.”
They disingenuously exclaim: “Don’t let Congress take off with your credit card rewards.”
We know that is not the case.
The bipartisan legislation has nothing to do with rewards points and everything to do with free-market competition. Whether it is hotels, convenience stores, food service or any other industry, a dynamic marketplace with healthy competition helps keep prices reasonable for consumers. It incentivizes companies to provide better products and services.
The Credit Card Competition Act aims to apply that same thinking to the payments industry. More specifically, mega banks with more than $100 billion in assets must include a single additional processing network on the cards they issue. In practice, additional competition means businesses would have more options for processing a customer transaction.
The credit card market is consolidated under corporate power players Visa and Mastercard, sometimes to the detriment of consumers and small businesses. The “tag team” controls 80 percent of the market and acts as a duopoly — fixing the “swipe fees” that banks charge merchants so that those banks do not compete on price. “Swipe fees” are charged to businesses whenever a customer swipes, inserts, or taps a credit card to purchase anything from a toothbrush to a hotel room.
Since unilaterally imposed price-fixing fees have ballooned, businesses have no choice but to bake the inflationary swipe fees into their prices. How much money are we talking about? The swipe fees on Visa and Mastercard credit cards alone were more than $100 billion last year, and they have tripled since 2010. The costs then get passed onto consumers in the form of higher prices on everything from guest rooms to groceries, affecting every family and multiplying the effects of inflation. Families end up paying $1,024 more yearly thanks to these invisible fees.
Despite fear-mongering pushed by the banking industry, credit card rewards points will keep going strong if we have competition in the credit card market. An independent fact-checking service found that the credit card industry’s claims that rewards would be harmed were false. Further, one payment industry expert analysis found the Credit Card Competition Act would affect rewards points by less than one-tenth of 1 percent. It is just common sense. The United States has the highest swipe fees in the world, but the rest of the world still has reward points and airline miles. The commotion that rewards would be negatively affected is a scare tactic.
Other arguments saying the bill will jeopardize security are equally ridiculous.
According to data from the Federal Reserve, independent processing networks like Star, Shazam and NYCE — which this legislation would allow to compete — have one-eighth the Visa and Mastercard fraud rate. Increased competition would drive credit card companies to improve security even further to attract more users.
Plus, the bill proactively bars foreign, state-owned, or controlled networks like China UnionPay.
The U.S. credit card market needs competition. Small businesses like independent hotels are being crushed by inflationary “swipe fees.” Injecting free-market competition into the processing arena is one strategy that will keep costs reasonable without undermining credit card rewards points or payment security.
Robust rewards programs plus secure transactions will continue to be the norm, but reducing credit card swipe fees through competition will be a decisive win for all.
