By Allen Kopelman
Nationwide Payment Systems
Consumers and business owners are feeling inflation's pinch at gas pumps, grocery stores and checkout lanes in stores and online, but that's no reason to balance the books on the backs of small and midsize businesses (SMBs). And yet, it seems government officials are taking this approach in the form of new proposals that threaten entrepreneurship and the payments industry. If the Competition in Credit Card Transactions and the Small Business Surtax become law, merchants, ISOs and merchant level salespeople (MLSs) will face even more serious hardships than they are already weathering with record inflation.
The Competition in Credit Card Act, sponsored by Sen. Dick Durbin, D-Ill., and Rep. Roger Marshall, R-Kan., is an ill-informed effort to dismantle credit card processing networks by lifting restrictions on credit card rails. For example, if you're a merchant processing a Mastercard transaction, you can decide to let another network, other than Mastercard, process the transaction. How does that help anyone? In the bill, Durbin and Marshall called 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)." Do they think these two card brands are piñatas?
What Durbin and Marshall are actually proposing is "on-us" transactions, a concept we've seen before when First Data tried to bypass card brand networks. In the 2006 lawsuit, Visa USA vs. First Data Corp. et al., First Data claimed to have suffered injuries as a Visa acquirer but failed to prove any wrongdoing by Visa. The ruling demonstrated the importance of providing material proof of injury, especially in cases as complex as this one, involving multiple parties and upstream and downstream partners. The language in the proposed credit card competition bill suggests a credit card issuer with sufficient assets could process their own cards and cut out Visa and Mastercard. ABC Bank could have all cards routed to their system and charge whatever they want for "interchange" and call it an on-us transaction. This on-us transaction would bypass the card brand networks and go right to the card issuer/bank. And by the way, this card issuer would not even be in business had it not been for the card brands.
What impact would this so-called competition have on our current card processing environment? It would give the largest banks a way to get all the business and ruin the credit card processing market as these banks put everyone out of business and cut out the card brands who built up the business.
What Durbin and Marshall are really suggesting with this bill is the very definition of antitrust. If I had the chance to sit down with them, I'd explain how a transaction works, what is behind it and how it benefits merchants and cardholders. Over a whiteboard and a few coffees, it would not take long for them to understand what is really going on.
If Congress lets mega banks do on-us transactions and cut out Visa and Mastercard, it will give big businesses lower fees and a competitive advantage over SMBs, ISOs and MLSs. This bill is dangerous on many levels. We've already seen an antitrust ruling on this, but Congress is forging ahead with plans to help banks and big business—and let small guys suffer in the process.
Remember the 2005 lawsuit, Wal-Mart Stores Inc. vs VISA U.S.A. Inc.? This case actually helped small businesses by forcing Visa and Mastercard to create a special reduced rate for "swiped" check cards that were linked to a bank account. This was good and merchants actually got money back from the card brands.
But a few years later, the Durbin Amendment, introduced as a last-minute add-on to the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, ended up costing small merchants much more in debit transaction fees. Once again, big businesses profited, as in the following example:
As this example demonstrates, big business owners are saving 91 cents a transaction! The Durbin Amendment claimed to help small businesses but in the end made debit card processing more expensive. Before Durbin, you'd see four or five network symbols on the back of your debit card, and debit card processors would route transactions to the least expensive network because it was good business. Durbin required only two networks, and that drove up the network costs without delivering any benefits. To this day, it is less expensive to dip an EMV chip card than a debit/check card at the POS.
Another looming threat to small and midsize business owners is a double taxation proposal that policymakers are positioning as a Small Business Surtax. This tax increase would be part of the government's trillion-dollar tax and spend proposal currently being negotiated by Senate Majority Leader Chuck Schumer, D-N.Y., and Sen. Joe Manchin, D-W.Va.
If you own a business or serve the SMB community, I urge you to join the fight to stop this new tax, which would harm small businesses. This small business tax is essentially double taxation, which is against federal laws. SMBs already pay tax for their businesses' profits on their personal tax returns, but the government wants to collect another 3.8 percent.
This would mean a business making $250,000 in profit would have to pay an additional $9,500 in taxes, a small amount that would be too costly for the business owner to go up against the IRS to appeal or fight. The government is arming the IRS with 80,000 new employees to weaponize them against small and midsize business owners, who are already taxed and may soon be double taxed.
NFIB, a nonprofit, nonpartisan, member organization for small and independent businesses, is strongly opposed to this legislation. "Congress thinks small business is a tax loophole, and that your business needs to pay more taxes," NFIB representatives wrote. "Specifically, they want to add a 3.8% tax, as part of the Senate's version of the Build Back Better Act, characterizing it as the closing of a loophole."
Fortunately, the NFIB subsequently reported that small business owners successfully urged the U.S. Senate "to remove the new 3.8% small business tax from the Inflation Reduction Act of 2022 and ensured the House did not add it back in." For more details on the NFIB's work and to add your voice to those working to make lawmakers responsive to the needs of their small business constituents, visit www.nfib.com/nonewtax/. And to help ensure that the Competition in Credit Card Act (Durbin 2.0) does not become law, get involved at https://saveourpoints.org.
Card brands and small business owners keep our economy going during the best and worst of times. Without them, we would not have a payments industry. Let's support them now at this time of need.
Allen Kopelman, a serial entrepreneur is cofounder and CEO of Nationwide Payment Systems Inc. and host of B2B Vault: The Payment Technology podcast. Email him at firstname.lastname@example.org and connect on LinkedIn www.linkedin.com/in/allenkopelman/ and Twitter @AllenKopelman.
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