Durbin 2 - This Time Its Credit Cards

August 1, 2022
The US senator, famed for his regulation of debit cards interchange, has introduced a bill to open up competition in the credit card market by enabling merchants to choose a Visa or Mastercard alternative routing when processing a credit card transaction.

The US senator, famed for his regulation of debit cards interchange, has introduced a bill to open up competition in the credit card market by enabling merchants to choose a Visa or Mastercard alternative routing when processing a credit card transaction.

Last week (July 28), Dick Durbin (D-IL), US Senate majority whip and author of the US post-financial crash debit card legislation, introduced the historic bipartisan Credit Card Competition Act.

The bill, co-sponsored by Republican Senator Roger Marshall MD from Kansas, would direct the Federal Reserve to ensure that large credit card-issuing banks offer a choice of at least two networks over which a credit transaction may be processed.

The bill requires the Fed to issue regulations within one year, ensuring banks that issue credit cards using four-party card systems and have assets of more than $100bn must offer merchants a choice of no less than two unaffiliated networks for processing electronic credit transactions.

The bill also states that at least one of these alternatives must be outside the top two largest networks, i.e., Visa and Mastercard.

The provisions aim to fill a gap that exists in the regulation of credit cards in the US.

Twelve years ago the original Durbin Amendment ordered large card issuers to allow merchants to choose between two competing networks for debit card transactions and introduced a cap on debit card interchange fees.

By contrast, rules around credit card transactions in the US were left untouched.

Partly as a result, credit card fees are substantially higher than debit card fees in the US.

The Nilson Report estimated that in 2021 merchants paid $105.23bn in total fees for credit card transactions, compared with $32.6bn for debit card transactions.

According to payments consulting firm CMSPI, the Durbin Amendment saved merchants an estimated $9.4bn a year, with 70 percent of savings passed along to consumers.

Its analysis now suggests that credit card routing could save consumers and retailers $11bn plus annually, Callum Godwin, CMSPI’s chief economist, told VIXIO.

“So this bill’s going to massively benefit consumers and retailers, especially at a time when inflation is reaching record highs,” he said, noting that it also benefits the payments firms looking to enter that space and compete."

“Credit card swipe fees inflate the prices that consumers pay for groceries and gas. It’s time to inject real competition into the credit card network market, which is dominated by the Visa-Mastercard duopoly,” Durbin said.

Visa and Mastercard dominate the US credit cards market. According to the Federal Reserve, they account for nearly 576m cards, or about 83 percent of general-purpose credit cards. Visa and Mastercard credit cards transferred $3.49trn in the US in 2021.

But merchants have “effectively no leverage” to negotiate fee rates and terms with Visa and Mastercard, according to the senators, because they cannot risk losing access to all the consumers served by Visa and Mastercard’s member banks.

“This legislation, which builds upon pro-competition reforms Congress enacted in 2010, would give small businesses a meaningful choice when it comes to card networks, and it would enable innovators to gain a foothold in credit cards.

“Bringing real competition to credit card networks will help reduce swipe fees and hold down costs for Main Street merchants and their customers,” the senators added.

The bill follows a Congressional hearing in May, when Durbin urged the card giants to amend their practices to allow for healthier fees and better competition, particularly in the credit card market.

Enabling choice for credit card routing was one of the five measures he proposed for Congress to consider at the time. However, a notable omission in his proposal, now and then, is any mention of a cap on credit card fees.

Nonetheless, merchants and some experts are optimistic that the bill could eventually make credit card fees more affordable.

“If one network lowers its swipe fees, merchants will favour that network and others will do the same in order to compete,” said Doug Kantor, executive committee member of the Merchants Payments Coalition (MPC) and general counsel of the National Association of Convenience Stores.

“Routing choice means market forces will govern swipe fees and the market will eventually settle on rates that are fair to merchants, banks, card networks and consumers alike,” Kantor told VIXIO.

In addition, mandating competition for routing may lead to better outcomes.

“We’ve seen elsewhere in the world that sometimes caps create a whack-a-mole situation; if you cap one fee, another pops-up in it’s place,” Godwin said, adding that co-badging and routing “are typically more effective long-term solutions to creating competition and creating a fairer playing field”.

“Greater network competition could serve to not only apply downward pressure on record-high fees, but also could promote innovation in the industry,” he noted.

Mixed reception

On its earnings call the same day, a Mastercard spokesperson said they “believe in a level competitive landscape and playing field”.

However, the concept of interchange is “a balancing factor” in the ecosystem and there are still a lot of open questions regarding the bill.

“What are the practicalities? What are the technical aspects of this? How many providers already have made the same kind of investments to really ensure that the consumer can rely on safety and protection and so forth? Those are open questions. We will have to see what the regulation actually foresees.”

Merchants have welcomed the introduction of the bill, saying the measure “would create long-sought competition that could save businesses and consumers billions of dollars a year”.

“This landmark bill would end a part of the Visa-Mastercard duopoly that has blocked competition for decades,” Kantor said.

By contrast, the American Bankers Association (ABA), joined by eight other financial services trade groups, has opposed the bill, calling it “deeply flawed”.

The banks’ lobby group argues that the bill goes beyond the Durbin Amendment in its measures.

First, the Credit Card Competition Act requires large credit card issuers to add a second network to their customers’ cards choosing from “certain options set by the Fed”, whereas the Durbin Amendment allows banks to choose from “any two unaffiliated networks” for debit card transactions.

Another provision not found in the Durbin Amendment is a requirement that “banks accept virtually any kind of transaction, functionally requiring banks to onboard potentially many more than two networks”.

The banks claim the new routing mandate would fall “disproportionately” on card issuing credit unions and community banks.

“At a time when fraud prevention, cybersecurity, and digital innovation are more critical than ever, this deeply flawed legislation from Senators Marshall and Durbin will undermine the significant safeguards and security that exist today to protect credit card payments,” the statement argues.

“Retail groups want Washington to mandate that banks route credit transactions to the cheapest networks — many of which have underinvested in their platforms with little concern for security innovations — leaving the burden on consumers, small businesses, and financial institutions to clean up when things go wrong.”

In response to this argument, the merchants' group pointed out that the bill would apply only to cards issued by banks with $100bn or more in assets. These institutions are fewer than three dozen institutions but they represent about 90 percent of Visa and Mastercard credit card volume.

Therefore, the MPC concludes the bill “would have no impact on small community banks”.

The way through Congress

Durbin is a leading member of the Senate and in 2010 he could push through his debit card legislation with significant bipartisan support in a 64 to 33 vote.

However, getting this bill passed “will not be easy”, Kantor noted.

There is a large vested interest by the card industry to keep up the status quo.

“Merchants don’t have the financial resources of the card industry,” Kantor stressed.

“But we have small businesses and their customers on our side, and members of Congress are increasingly aware of the impact these fees have on Main Street businesses and consumers,” according to Kantor.

Having credit card fees fixed is particularly timely now that the cost of living is surging and inflation has hit near-record levels.

The MPC previously warned that because credit card fees are set as a percentage of the transaction, a 7 percent inflation rate on an item originally sold for $100 now sold for $107 would result in the parallel increase of merchants’ costs from an average $2.22 to $2.38.

“We think in the end Congress will stand up for Main Street over Wall Street,” Kantor said.

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