Potential Economic Impacts of the Credit Card Competition Act of 2023

Loyola Consumer Law Review Volume 36 Issue 2 Article 2 2024 Potential Economic Impacts of the Credit Card Competition Act of 2023 Ling Ling Ang NERA Economic Consulting Alan Grant NERA Economic Consulting Peter Traber NERA Economic Consulting Follow this and additional works at: https://lawecommons.luc.edu/lclr Part of the Consumer Protection Law Commons Recommended Citation Ling Ling Ang , Alan Grant & Peter Traber Potential Economic Impacts of the Credit Card Competition Act of 2023, 36 Loy. Consumer L. Rev. 149 (). Available at: https://lawecommons.luc.edu/lclr/vol36/iss2/2 This Feature Article is brought to you for free and open access by LAW eCommons. It has been accepted for inclusion in Loyola Consumer Law Review by an authorized editor of LAW eCommons. For more information, please contact . POTENTIAL ECONOMIC IMPACTS OF THE CREDIT CARD COMPETITION ACT OF 2023 Dr. Ling Ling Ang, Dr. Alan Grant, and Peter Traber NERA Economic Consulting 149 150 Loyola Consumer Law Review Vol. 36:3 Abstract: We consider the potential economic impacts of the Credit Card Competition Act of 2023 ("CCCA"), drawing on economic literature on two-sided markets and effects of previous U.S. regulatory policy associated with payment cards. Implementation of the CCCA shifts network routing choice from the consumer side of the market to the merchant side of the market. While this would likely decrease interchange fees, an interchange fee decrease only reflects a shift in the balance of costs from the merchant side to the consumer side not a decrease in the total price of processing a credit card transaction. A reduction in interchange fees for cards issued by covered card issuers could lead to reductions in rewards from covered issuers and would likely disproportionately reduce access to reward points for groups with low credit quality. The CCCA will not necessarily decrease the total price of processing a credit card transaction, regardless of its impacts on interchange fees. We find that the exclusion of threeparty system issuers from CCCA coverage could potentially artificially advantage three-party systems over covered issuers and covered fourparty systems networks. The net effect on consumers from the entry of additional four-party system networks due to the CCCA is ambiguous. Keywords: Credit cards, two-sided markets, regulation, competition, payments, economics. Statements and Declarations: This research was funded by JPMorgan Chase Bank, National Association; NERA Economic Consulting was commissioned by JPMorgan Chase Bank, National Association to perform independent analysis of the potential economic impacts of the Credit Card Competition Act of 2023. 2024 Credit Card Competition Act of 2023 151 TABLE OF EXHIBITS Exhibit 1: Illustration of Parties in a U.S. Credit Card Transaction 157 Exhibit 2: Flow of Payments and Fees in a Four-Party Credit Card System....................................................................................164 Exhibit 3: Flow of Payments and Fees in a Three-Party Credit Card System....................................................................................165 Exhibit 4: U.S. Credit Card Share by Card Networks By Number of Credit Cards in Circulation 2021...........................................168 Exhibit 5: U.S. Credit Card Share by Card Networks By Total Transaction Volume 2021...............................................................169 Exhibit 6: U.S. Consumer Credit Card Amount Outstanding Bank Issuers Q2 2023 ........................................................................ 171 Exhibit 7: U.S. Bank Issuers with Assets Over $100 Billion Consumer Credit Card Amount Outstanding Q2 2023 ................ 173 Exhibit 8: Largest Merchant Acquirers in the U.S. By Number of Transactions Processed 2022.................................................175 Exhibit 9: Percentages of Total Average Dollar Value Spent Per Consumer As Reported by SDCPC Survey Respondents By Payment Method 2015-2022........................................................176 Appendix Exhibit 1: Participation of Users if Price is $16 and Participation of Other Side is 90%...................................................210 Appendix Exhibit 2: Participation of Users if Price is $18 and Participation of Other Side is 90%...................................................211 Appendix Exhibit 3: Participation of Users if Price is $16 and Partici- pation of Other Side is 60%...................................................211 152 Loyola ConsumerLaw Review Vol. 36:3 EXECUTIVE SUMMARY This whitepaper considers the potential economic impacts of the Credit Card Competition Act of 2023 ("CCCA"), drawing on economic literature on two-sided markets and the effects of previous U.S. regulatory policy associated with payment cards. We begin with a discussion of the participants in the U.S. credit card ecosystem, followed by a summary of the CCCA. We then present our analysis of the potential economic impacts of the CCCA. Our analysis is supplemented by appendices that include a primer on the economics of two-sided markets and a discussion of analyses of recent policy changes related to payment cards. The CCCA is currently a proposed bill in the Senate that includes the following four provisions: No Exclusive Networks: This provision prohibits networks and covered card issuers-card issuers who, together with their affiliates, have assets of more than $100 billion-from restricting transactions to a single network or to only affiliated networks. Further, at least one of the networks over which a transaction may be routed may not be one of the largest two networks by share of credit cards issued. No Routing Restrictions: This provision limits restrictions on merchants or acquirers who make transaction routing decisions: covered card issuers or networks cannot impose penalties or disadvantages for directing transactions or minimum transaction volumes. Further, the No Routing Restrictions provision also imposes limitations on requiring the exclusive use of security technology that cannot be used by all networks and prohibits inhibiting other networks from using a security technology. Applicability: The "Applicability" provision states that the "No Exclusive Network" and "No Routing Restrictions" provisions do not apply to credit cards issued in a three-party payment system model. Thus, the No Exclusive Network and No Routing Restrictions apply only to a subset of four-party system model participants. Designation of National Security Risk: This provision requires the Federal Reserve Board to publish a list of payment card networks that it determines pose a national security risk or that are "owned, operated, or sponsored by a foreign state entity." 1 The analyses in this report focus primarily on the potential effects of the No Exclusive Networks, No Routing Restrictions, and Applicability provisions. ' Credit Card Competition Act of 2023, S. 1838, 1 (...truncated)