We need a truly free market, not the Credit Card Competition Act

Capital One and Discover’s potential merger is a perfect example of why free-market competition is always superior to unelected government bureaucrats picking winners and losers. Real competition comes from private sector innovation, which increases consumer welfare and creates value for shareholders and retirees.

Soon after Capital One and Discover announced their plan, high-profile Democrats and even one Republican maligned the deal. But this all-stock proposal benefits investors — many of whom are U.S. households. Nearly 60 percent of all U.S. households own a defined contribution retirement account. Forty-two percent own an individual retirement account (IRA). To say this merger would only be a windfall for the rich is a bogus assertion. 

The proposed merger shows how the big government Credit Card Competition Act is bad policy. For starters, while Visa owns about 50 percent market share by volume, as Forbes notes, it is clear “there is no duopoly in this market in any objective sense.” 

Additionally, the act gives the Federal Reserve free rein to regulate credit card routing in near perpetuity. This is evidenced by the Fed’s continued regulation of debit cards years after the Durbin amendment was enacted. If you give the government an inch of new power, it will take a mile. 

To say the Credit Card Competition Act will help small businesses is also false. According to one paper, small businesses will largely lose access to $700 billion in revolving lines of credit and may lose more than $1 billion in rewards. 

Real relief for small businesses comes in the form of lower taxes. Enacting Rep. Lloyd Smucker’s (R-Pa.) bill to add permanency to the 199A small business deduction would provide substantial relief to small businesses. 

Approving the Capital One-Discover deal would further defeat the purpose of the Credit Card Competition Act. The act claims to enhance competition, but if the merger closes, justification for the bill’s three-party model exemption and card restriction for networks with the top two market shares weakens. 

The act was clearly designed to target only Visa and Mastercard — which is disgraceful for Congress to target specific companies — but if down the road the merged entity ends up with the second largest market share, the bill would prohibit the combined entity and Visa from providing their networks on the same credit card. At the same time, banks that own networks, such as Discover and American Express, are exempted from the bill’s provisions. The bill would contradict itself. 

The market is always shifting. Codifying the Credit Card Competition Act’s self-defeating and onerous restrictions would only distort the market by treating certain networks differently. The government would be picking winners and losers. 

This further illustrates how its advocates are talking out of both sides of their mouths. 

On the one hand, progressive politicians like Sens. Dick Durbin (D-Ill.) and Elizabeth Warren (D-Mass.) claim to advocate for competition and hyperventilate over corporate consolidation. On the other, such legislation would freeze the market to the benefit of incumbents and discourage new entrants. This distortive approach would decrease competition to the detriment of American consumers, the opposite of Durbin and Warren’s stated goal. 

Consideration of the consumer welfare standard is of paramount importance. In 2018, the U.S. Supreme Court ruled on a case where Justice Clarence Thomas pointed out that a credit card “is more valuable to cardholders when more merchants accept it and is more valuable to merchants when more cardholders use it.” 

The court found the fee charged by American Express was not “higher than the price one would expect to find in a competitive market.” Moreover, the court found that “Amex’s increased merchant fees reflect increases in the value of its services and the cost of its transactions, not an ability to charge above a competitive price.” 

In this case, an increase in fees did not restrict output and consumers were not in a worse position. This is evidence of a healthy market, not one that needs the Credit Card Competition Act.  

If regulatory barriers do not stand in the way, free market competition will find a way. Credit card competition is a product of creating shareholder value and finding opportunities to generate supply to meet the demand for electronic payment cards that offer rewards, privacy protections and easily accessible lines of credit. 

Instead of fostering competition, Congress will kill it by handing the reins to the Fed. The free market is the answer.

Bryan Bashur is the director of financial policy at Americans for Tax Reform. Tom Hebert is the director of competition and regulatory policy at Americans for Tax Reform and executive director of the Open Competition Center.