How the Credit Card Competition Act of 2022 will impact communities of color

The COVID-19 pandemic and recent economic downturn have taken a toll on American families, particularly those in BIPOC communities.

While there are some signs of recovery, Black Americans continue to experience gaps in employment and economic opportunity.

Researchers at Duke University point out that much of this current inequity can be traced to the difficulty Blacks and Latinos faced in the decade following the Great Recession of 2007-2009. During the recession, Black households lost 48% of their wealth and Latino households suffered a 44% decline. By comparison, white households lost just 26% of their wealth. By the onset of the 2020 pandemic, Black households had less than 15% of the net worth of their white counterparts. This left Black Americans without a solid financial safety net.

There are a multitude of factors that play into the lack of economic opportunity for Black Americans and other people of color. One of the least understood is inequities within the banking system.

Data from the Board of Governors Federal Reserve System in 2019 show that 32 percent of African Americans are underbanked, and 14 percent do not have any access whatsoever to banking. Worse yet, researchers at the Brookings Institute found that Black men and women pay more than twice as much in monthly bank fee costs than white Americans.

Ten years ago, Illinois Sen. Dick Durbin authored an amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act. The purpose of the Durbin Amendment was to help consumers and retailers save money by capping the rates to process debit card transactions at a flat 22 cents instead of a percentage of the transaction total. The assumption was merchants would save money on these interchange fees and then pass the savings on to consumers. This did not happen.

The reality is that the Durbin Amendment was a boon to companies like Amazon, Target, Wal-Mart and other big box retailers. Flat rate interchange fees on debit card transactions saved them money on large purchase totals and ultimately led to an extra $90 billion in revenue.

Conversely, smaller retailers paid the price for the Durbin Amendment. Instead of paying 1 percent interchange fees on small debit card purchases, they were forced into the 22-cent flat rate. In some instances, this translated to a 1,000% increase in interchange fees. As a result, most businesses either kept their prices at pre-Durbin Amendment levels or increased them.

Banks were also negatively affected by the Durbin Amendment. To counteract revenue losses, many enacted policies to save money elsewhere. Banks began eliminating free checking, increasing ATM fees and closing branches in financially marginalized areas. This has had a detrimental impact on the Black community and has prevented people of color from accessing banking services.

Despite the failure of the Durbin Amendment to protect consumers, lobbyists for big box retailers have successfully persuaded lawmakers to draw up similar legislation for credit card transactions. The Credit Card Competition Act of 2022 seeks to create more competition among U.S. credit card networks by allowing merchants to route payments through unaffiliated networks. The idea is that the two largest networks, Visa and Mastercard, would be forced to lower their routing fees in order to stay competitive. Merchants would reap the benefits of this competition and the savings would be passed on to consumers.

Unfortunately, just like the Durbin Amendment, the Credit Card Competition Act of 2022 will ultimately fail to meet its objectives. Marginalized communities will pay the price for this failure when credit card companies attempt to protect their bottom lines. Banks issuing credit cards will now begin raising interest rates, fees and credit standards in order to save money and restrict access to those deemed a credit risk. Sadly, the burden will fall heaviest on those who can afford it the least.

Brett Buckner is the managing director at OneMN.org, a research-based, advocacy and Communications project to provide public policy recommendations that support and propel racial, social and economic equity throughout state, county, local governments, agencies and corporations.