The Black community has struggle to keep up financially with white peers. Much of this can be attributed to a lack of access to financial services offered to the community.
Loan shark services and high interest payday loans are far more prominent in Black neighborhoods while those residents see limited access to traditional banks, credit unions, and established services. According to data provided by the Federal Reserve Board of Governors, in 2020 and 2021, 40 percent of the Black community remains without traditional checking or savings accounts compared to 12 percent of white peers.
Community banks and credit unions—many of them Black-owned or serving communities of color—have been able to create partnerships in these communities to advance access to banking services for people of color. An Urban Institute report showed that Black-owned banks and credit unions focus primarily on lending to small businesses, nonprofits, and Black homebuyers.
However, these partnerships and services are in danger if Congress passes the Credit Card Competition Act in 2023. Banks and credit unions can only offer expanded services through the revenue they generate. Much of that revenue comes from their ability to charge transaction fees when merchants accept a debit or credit card payment.
The legislation would severely limit how much banks and credit unions can earn off fees from credit card transactions. Ten years ago, a different bill limited how much banks and credit unions could earn off debit card transactions, damaging communities of color.
In 2012, Senator Dick Durbin passed legislation known as the Durbin Amendment, which serves as a model for today’s proposed Credit Card Competition Act. The Durbin Amendment took aim at banks by limiting the transaction fee, or swipe fee, they could charge retailers who accepted debit card payments. The amendment set that fee at a flat rate; previously, the fee was a percentage of the total amount a customer was spending at the retailer.
Not only would these fees cover the cost of doing business and running the transaction, but it would also pay for network security as well as help banks cover the cost for free checking and savings accounts, low or no balance requirements, and reduced ATM fees.
In theory, the regulation would make the transaction fee cheaper for retailers, who were expected to then pass along those savings to their customers.
However, a decade of data shows that major retailers won that deal, and that the Black community paid the price. A Richmond Federal Reserve study showed that retailers’ prices either stayed the same or increased. As big box retailers saw soaring profits, small and community banks that served communities of color struggled to catch their stride as their revenue from debit card fees plummeted.
To compensate for their financial struggles, banks had to cut services like free checking, zero bank fees, and low or zero balance requirements. Unfortunately, this deal did not provide the grounding for many banks to continue to venture into communities of color where credible banking services lacked a presence.
To fill these voids, services like high-interest payday loans and loan sharks capitalized and preyed on communities that lack traditional banking services or established financial institutions.
According to data from the Brookings Institute, the number of banks within majority-Black neighborhoods has decreased by 14.6 percent since 2010, while the number of Black-owned banks has also declined. This is compared to a decline of just 0.2 percent of total banks in the rest of the United States during the same period.
Many programs and organizations have stepped up to launch or expand Black-owned banks or credit unions into Black neighborhoods, however, their efforts might be cut short if the Credit Card Competition Act passes. This legislation will attempt to regulate the credit market the same way the Durbin Amendment regulated the debit market while disregarding and undermining the needs of the Black community.
If the act is passed by Congress, we can expect to see the same impact within credit unions and credit access as we saw with the Durbin Amendment. We can expect to see a further decline in access to credit and banking, especially within our communities of color, which already face a higher rate of credit denial than that facing white peers.
Access to credit is a large factor when it comes to creating wealth and financing large purchases. For instance, one of the largest purchases people make using credit is a home, which is also one of the most important investments someone can make. Credit can be a determining factor of whether someone owns a home and builds a net worth.
Senator Durbin recently attempted to add the legislation into the defense spending bill, however, it was rejected out of that bill and now looks geared to become a stand-alone piece of legislation.
While the decision is ultimately up to Congress, we can make our voices heard by calling or writing Senator Amy Klobuchar and Senator Tina Smith to let them know that you do not support the Credit Card Competition Act.
