Durbin Pushes For Credit Card Regulation But No Fee Cap

May 6, 2022
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In a congressional hearing, Senator Richard Durbin (D-IL) proposed a number of measures to restore competition in the credit card market, but a swipe fee cap was not one of them.

In a congressional hearing, Senator Richard Durbin (D-IL) proposed a number of measures to restore competition in the credit card market, but a swipe fee cap was not one of them.

At Wednesday's (May 4) hearing, Durbin called on legislators to increase transparency around interchange fees and ordered the card giants to amend their practices to allow for healthier fees and better competition.

Durbin, who pushed forward historic legislation capping certain debit card fees, stressed that “the credit and debit card systems are not competitive market places”.

The US has a broken and uncompetitive market in the way swipe fees are set, whereby Visa and Mastercard centrally set interchange fees that merchants must pay to banks. Competition between the two card networks for card issuers means they try to outbid each other’s offering in relation to interchange fees.

Although the Durbin Amendment introduced a cap on how much large banks, those with assets above $10bn, can charge for debit card fees, no such provisions limit credit card fees.

More than a decade after passing the legislation, Durbin now urges the senators to consider further measures that could fix excessive credit card fees and open up competition for start-ups and new market entrants.

He urges lawmakers to require transparency from Visa and Mastercard. “Let’s have transparency and make it clear for consumers in their monthly statements how much of their card purchases have been deducted as interchange fees.”

“You know you have the information and you know you can provide it,” he told Visa and Mastercard.

Although it is unclear what consumers are supposed to do with this information and why this would improve competition, this largely symbolic move could, according to Durbin, encourage consumers to consider a different payment method if they knew how much a card payment was costing their favourite restaurant or shop.

He is also seeking actions to stop the practice of charging swipe fees on the sales tax portion of transactions.

“That is a swipe tax on top of a sales tax: A tax on a tax,” Durbin stressed.

He urges actions to stop the exclusivity deals where Visa and Mastercard tell banks they cannot use any other network on their cards and give merchants a choice of card network options on each swipe and each online sale.

In addition, Congress should “make sure that someone besides the dominant network plays a role in setting security standards for cards. Security innovators and startups are being shut out of the current system.”

Finally, he pushed for provisions that prevent networks from driving up swipe fees to unreasonable levels thereby reducing inflationary pressure on Americans.

Although these measures are intended to bring competition to the credit card market, Durbin is not proposing an outright cap on credit card interchange or other fees.

Merchant voice

Retailers, represented by Doug Kantor from the Merchants Payments Coalition and National Association of Convenience Stores and Laura Shapira Karet, CEO of Giant Eagle, said they “simply ask for fair competition”.

Karet stressed that bank costs are among the top three costs of merchants. Most retailers typically operate on a 1.1 percent margin, while banks have over 30 percent profit margin, the highest among all sectors tracked, Kantor added.

“We are not asking for huge regulatory things and caps and decreases. What we are asking for is a level playing field so there is competition” Karet said.

“I do believe that is the role of our government to create level and fair playing fields,” she added.

Meanwhile, Visa and Mastercard’s "Honour All Card" rule also came under the spotlight during the hearing.

That rule requires participating merchants to accept every Visa or Mastercard card issued by any issuer. This means that merchants may end up paying significantly higher prices for accepting all cards, while it alleviates market pressure on issuers.

For example, corporate cards and various elite branded credit cards typically charge higher interchange rates, which issuers promote with generous rewards programmes.

“What it does is that it tells those institutions, even the largest ones, that they no longer have any incentive to go to the merchant” and negotiate terms with them, “because all the merchants are required to accept their cards anyway”, Kantor explained.

Eliminating the Honour All Card rule will “no question” increase competition, according to Kantor. “This is one of the central things getting in the way of real market competition.”

Thinking out loud, Senator Mazie Hirono (D-HI) said it “might be an area of focus” for Congress to explore whether they need to eliminate this rule.

Durbin announced the hearing after the card giants raised their card fees at the end of April despite bipartisan opposition from Congress.

Concluding the hearing, Durbin said: “My bottom line is simple: it goes back to 16 years ago. Some merchants cannot even get the complete contracts, they get a summary of it. It is so complex it lacks any effort toward transparency or simplicity.

“And secondly: there is no competition. They announced the fee changes, both companies, on the same day. We know there is a dual-engined force in this situation.

“I don’t think this is healthy. I think if you believe in a market economy, competition is part of it. This conversation will continue.

“We are facing inflation and the last thing American people need is a higher swipe fee. I wish both companies have resisted the urge to make some money when they can,” Durbin concluded.

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