Regulation Backfire? The CCCA Poses Risk to Small Banks and Low-Credit Borrowers

At first glance, the Credit Card Competition Act (CCCA) appears to be a boon to ordinary Americans tired of excessive interest rates and swipe charges.

But University of Miami finance professor Indraneel Chakraborty said the legislation’s unintended results could eliminate credit where it is needed most: smaller banks and credit unions that service low-income and subprime populations.

BadCredit.org recently interviewed Chakraborty on his latest research into how the CCCA has the potential to disrupt current alliances within the credit card system and reduce credit availability in smaller markets.

The resulting evidence points to a familiar story: Benevolent financial regulations that end up hurting poor borrowers by forcing small players out of the market.

Most of these regulations essentially overlook the balance, Chakraborty said. “You can’t regulate into a better solution. If you raise costs in a free market, you contract that market — and that’s exactly what the CCCA has the potential to do.”

The legislation singles out banks with over $100 billion in assets, mandating that they provide at least two payment systems to process credit cards. It would seem like the kind of policy that would promote competition and reduce costs.

But in practice, it becomes an expensive commitment to duplicate infrastructure. Though the law does not directly affect smaller institutions, its impact could fall heaviest on them.

Most small credit unions and banks do not issue credit cards themselves. Instead, they contract with larger banks or fintechs to offer credit access through white-label programs.

Chakraborty warns that the CCCA undermines those arrangements. “If you regulate the large banks, you take away from them the incentives to have relationships with small banks,” he explained. “That denies credit to the communities that rely on those relationships.”

The statistics support him. Chakraborty figures that small issuer carve-outs in the legislation are pointless, as the 36 largest U.S. banks command more than 90% of credit card balances.

And studies by the Federal Reserve demonstrate that credit card processing profit margins are already a fraction of a percentage point. Adding a second network does not boost profits — it just boosts expense.

Chakraborty compares that to making companies put in a second phone line that they didn’t request and that they never need. “If we needed two lines, we’d have installed them,” he explained. “Mandating without subsidizing just puts a cost on both. For large players, it’s a nuisance. For small players, it’s disastrous.”

There are resonances of the Durbin Amendment, a part of the Dodd-Frank Act that in 2010 limited interchange fees on debit cards. That regulation also exempted small banks and credit unions, but subsequent data demonstrated that those institutions still experienced reduced revenue and market share.

One can’t regulate 90% of the share and hope that the remaining 10% carries on unscathed, Chakraborty argued. “Both of them are served by the same payment systems, and the cost gets shifted around.”

The consequence? Consolidation. Smaller banks could not afford to take the revenue loss, and they left the market or merged with larger banks. As a recent SSRN paper by Chakraborty describes, a similar fate awaits if CCCA passes.

State legislation in states such as Illinois and California compounds the pressure by considering eliminating tips and sales tax in interchange fees. These changes could reduce small bank revenue by $1.6 billion a year, or a quarter of net income, according to estimates from Chakraborty.

That sort of loss hits small lenders — namely, small institutions that serve rural or underdeveloped markets — where it hurts most. Smaller institutions already have to work with marginal returns on assets. Credit cards no longer breaking even are the first to be eliminated.

And it means trouble for consumers with poor credit. These borrowers are ignored by issuers at the national level but welcomed by community banks familiar with local risk. As Chakraborty has pointed out, taking credit access away from these banks does not level the playing field — it wipes it out.

Subprime consumers rely on small institutions to provide them with first-time or their sole access to revolving credit. Without those ports of entry, they will find themselves driven toward predatory alternatives, including high-cost payday loans. That broadens the divide between prime and non-prime consumers over time.

“We are not talking of eliminating fat from the system. We are speaking of cutting into the bone,” he told them. “Spreads are already too lean. The CCCA may make a number of those alliances economically impossible.”

Although the CCCA’s intent is to enhance competition, Chakraborty’s study indicates that it could do the opposite. By destabilizing relationships between small and large institutions, the bill could drive industry consolidation and limit consumer choice, particularly among those at the edges.

It’s not a new pattern. Policymakers consistently have underestimated the ripple effects of broad regulation. Whether it was the Durbin Amendment, the Dodd-Frank rules, or the CFPB’s proposed rules on payday loans, the consequences often were reduced access to credit by those hanging by the financial thread.

Rather than requiring costly infrastructure, Chakraborty suggests stimulating innovation by reducing regulatory barriers to new players entering the payment network market. “That’s how you create actual competition,” he explained. “Not by making everybody have a second phone line.”

While debate rages over the CCCA, Chakraborty urges lawmakers to look back at how earlier cost-containment measures have come back to bite the industry in question. It is when regulation drives essential services into unprofitability that consumers with the fewest choices are squeezed first.

“It’s the time-honored tale of best intentions that have gone amiss,” he said. “And in finance, they tend to fall on those least able to manage them.”