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Friday, July 29, 2022

Durbin's second act threatens credit card rails

Payments industry analysts are discussing a new proposal, sponsored by Sen. Dick Durbin, D-Ill., and Rep. Roger Marshall, R-Kan., that aims to derail existing credit card networks. While the proposed bill purports to expand merchant choice, opponents claim it reflects a lack of understanding of credit card processing architecture, functionality and interchange pricing.

In her July 27, 2022 post, "Senate Bill Takes Aim at Visa, Mastercard Credit-Card Fees," Wall Street Journal reporter AnnaMaria Andriotis stated the expected bill reflects growing congressional scrutiny of the credit card industry.

"Most shoppers don't think twice about how their payments are processed when they buy something with a credit card. But the underlying plumbing and its associated fees represent a fierce source of contention between merchants that pay the fees and big card networks and banks that set or collect them," she wrote.

Bracing for impact

Allen Kopelman, co-founder and CEO of Nationwide Payment Systems, stated the bill, if passed, will put ISOs and merchant level salespeople (MLSs) out of business. "This bill is very dangerous on many levels, there was already an antitrust ruling on this, and Congress wants to help banks and big business and let the small guys suffer in the process," he said.

The Competition in Credit Card Act attempts to lift what it terms "routing restrictions," which Kopelman called a baffling concept for payments industry insiders who consistently strive to optimize transaction routing and enrich the commerce value chain by layering in protections and value-added services. In addition, the bill would pose logistical challenges for networks tasked with routing transactions from alternative card brands, he noted.

"There is so much to unpack here, beginning with the idea that a card issuer or payment card network will not be able to direct the routing of electronic credit transactions to a particular card network or inhibit a merchant from using any other network or security technology for the processing of those electronic credit transactions," Kopelman said, referring to specific language in the bill.

Proposed changes to credit card processing network routing and infrastructures would become effective within a year of the bill's passage, the bill's authors stated, calling Visa and Mastercard "the 2 largest market shares with respect to the number of credit cards issued in the United States by licensed members of such networks (and enabled to be processed through such networks)."

Here we go again

Kopelman remarked that Sen. Durbin's previous assault on the debit card rails, in the form of a last-minute amendment to the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, ended up hurting thousands of small businesses, including coffee shops, bodegas and convenience stores. To illustrate his point, he provided the example of a coffee shop with a $7 average ticket:

  • Pre-Durbin: $7 small ticket interchange 1.65% or 1.55% and .04 cents: interchange cost to merchant/business = .16 cents

  • Post Durbin: $7 Durbin Interchange .05% and .22 cents: interchange expense to the merchant/business = .23 cents

"It is now costing merchants whose average ticket is under $13, 7 cents more just for interchange fees," Kopelman said. "Take a small coffeeshop doing $30,000 a month in sales. $30,000 ÷ $7 = 4,286 sales x .07 cents, which is an increase of $300 in interchange fees."

A little knowledge is a dangerous thing

Kopelman went on to say the 2010 Durbin Amendment allowed businesses to not take debit transactions below $10, but most small businesses could not do that because their customers had already become accustomed to making purchases with debit cards.

"The Durbin Amendment did not do what it intended to do—it actually made debit card processing more expensive," Kopelman said. "Before Durbin, your debit card would have four or five network symbols on the back and the debit card 'processor' would route the transaction to the least expensive network, which made good business sense. However, Durbin required only two networks, and that drove up the network costs without accomplishing anything."

Kopelman suggested the card brands, Visa, Mastercard, Discover and American Express, are being blamed for inflation. "These are all public companies traded on the stock exchange," he said. "These companies are owned by you and me, and these stocks are in your stock portfolio in your IRA account, in your 401K, in a mutual fund you own, in an ETF in your portfolio." end of article

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