Counting the cost: The hidden impact of policy changes on credit card users

By Hugh Carney
ABA Viewpoint

With their convenience and flexibility, credit cards have become an essential part of modern financial transactions and are often a consumer’s first entry into the broader financial services world. Unfortunately, recent policy proposals are threatening to disrupt this ecosystem, and the cumulative impact of these changes could have serious consequences for bank customers.

Three different proposals from three different sets of policymakers could have a compounding and negative impact on the credit card market. These proposals—collectively, the so-called Credit Card Competition Act, the CFPB’s late fee regulations, and the Basel III “endgame”—could have the effect of reducing access to credit and limiting consumers’ ability to build their credit history. In short, banks would be forced to limit products and services, and those they do provide would be more expensive.

This is the first article in a series examining the cumulative impact of multiple regulations on the U.S. economy and businesses. Read other entries in the series on credit card users and the mortgage market.
Each of these proposals carries potential consequences for consumers, but their cumulative impact should be particularly concerning. Unfortunately, as ABA has shared with the regulatory agencies and the administration, to date there has been no effort to measure the comprehensive effects of these proposed changes on the credit card market, not to mention the long list of additional regulatory changes currently facing America’s banks. Because of this, the public does not have a full picture of the total cost of these proposals, which would be greater than the sum of the individual proposals. This post, the first in a series examining the cumulative impact of the regulatory changes in play, looks at the proposed changes affecting the credit card marketplace.

Credit Card Competition Act

The CCCA, co-sponsored by Sens. Roger Marshall (R-Kan.) and Dick Durbin (D-Ill.), would allow merchants to pick which credit card network they want to process a transaction, which was one component of the 2010 Durbin Amendment framework for debit cards. Experience with debit cards shows that merchants invariably pick a lower-cost network without regard for security considerations, so consumers could see their transactions processed by firms that may not have the same security and fraud detection as existing networks.

In addition, a new routing mandate will inevitably reduce the revenue that banks receive for processing credit card transactions, which would mean that banks would have to reduce the popular rewards and benefits that revenue supports. Many consumers choose credit cards based on the rewards they offer, such as cash back, travel miles or other perks, and if banks can no longer afford to provide these incentives due to reduced interchange revenue, consumers will lose one of the biggest reasons to have a credit card in the first place.

CFPB late fees proposal

Adding to the struggles of making credit cards affordable, the CFPB issued a proposal in February that would effectively impose an $8 cap on credit card late fees. The CFPB proposal fails to recognize that, when set appropriately, late fees encourage consumers to pay on time and develop good financial management habits. In fact, a national consumer survey found that 68 percent of consumers felt that it is reasonable for banks to charge late fees. On the other hand, if late fees are too low, consumers are more likely to pay late and miss payments, leading to lower consumer credit scores, reduced credit access and higher credit costs.

As the bureau found with previous restrictions on credit card prices, if late fees are set at an appropriate amount to cover issuers’ costs, they effectively encourage on‐time payments and mitigate the risks associated with late payments. If fees are too low to cover costs, issuers may have to rebalance the risks to their credit portfolios in other ways. This could include reducing credit lines, tightening underwriting standards for new accounts, and raising annual percentage rates and fees for all cardholders—including those who pay on time.

Basel III endgame: Increased capital requirements

Among the many flaws of the Basel III endgame proposal is that it would impose a significant increase in the capital requirements for banks that offer credit card services. Too often, federal banking regulators engage in “gold-plating”—in other words, proposing regulations that go well beyond international standards. In this case, gold-plating is evident in the proposal’s approach to asset risk weights (which are supposed to reflect how risky assets are and therefore how much capital should support them).

In addition, the proposal would require banks to hold capital against undrawn credit lines and impose significantly higher operational risk capital requirements related to credit card activities. The increased capital requirements would lead to a more cautious lending approach, causing banks to become more selective in approving credit card applications and setting tighter credit limits. This could affect individuals with lower credit scores or those seeking to establish credit, making it more challenging for them to access credit cards.


The cumulative impact of the proposed policy changes on credit card services has the potential to dramatically alter the nation’s credit card market to the detriment of consumers. Increased capital requirements, limitations on late fees and government routing mandates may have separate rationales, but they have the potential to do real harm on their own—and especially in combination.

This is not just an ABA view. Members of Congress have also called for the banking agencies to pause their rulemakings and engage in a comprehensive cost-benefit analysis to better understand the interaction of various policy decisions, rather than considering each policy in isolation. Given the potential harm to consumers, it is imperative that this cost-benefit analysis be conducted now. Policymakers and the public need a full view of the broader effects of these changes on everyday Americans and the broader economy.

Hugh Carney is EVP for financial institutions policy and regulatory affairs at ABA.

ABA Viewpoint is the source for analysis, commentary and perspective from the American Bankers Association on the policy issues shaping banking today and into the future. Click here to view all posts in this series.