By Patti Murphy
Senator Richard Durbin, the Illinois Democrat who authored the 2010 legislation known as the Durbin Amendment, has a plan for upending credit card processing. The Credit Card Competition Act, authored by Senators Durbin and Roger Marshall, R-Kan., would require that every merchant get to choose which network processes its credit card payments, and only one of those networks can be operated by Mastercard or Visa.
The bill was introduced in July 2022, with Sen. Durbin asserting it would "inject real competition into the credit card network market, which is dominated by the Visa-Mastercard duopoly."
In October, Senators Durbin and Marshall tried fast-tracking the legislation by appending it as an amendment to a massive defense spending measure. While that plan was scuttled, it likely is not a once-and-done legislative maneuver. "[T]he threat of Durbin Amendment expansion remains," the Independent Community Bankers Association said in a statement. That same defense spending bill is slated for another vote later this month.
A similar bipartisan bill was introduced in the House by Representatives by Peter Welch, D-Vt., and Lance Gooden, R-Texas. "For too long the credit card companies and the nation's top financial institutions have collaborated to sideline community banks and local retailers in Texas," Gooden said. He added that his backing of the bill fulfills a "pledge to protect small businesses and ensure these companies can no longer use their monopolistic power to crush their competition."
But opponents argue that the bill will benefit the nation's largest retailers to the detriment of small businesses, financial institutions and ultimately consumers. And they point to the Durbin Amendment as evidence.
The Durbin Amendment, passed as part of comprehensive financial reform legislation, called for capping debit card interchange, as well as for allowing merchant choice in networks used to process debit cards. Durbin and other supporters hoped the legislation would save merchants money and that some of the savings would be passed on to consumers.
For covered FIs (those with $10 billion, or more, in assets) debit interchange rates were capped at 21 cents plus 5 basis points. The going debit interchange was 1 to 3 percent at the time, so the revenue loss was significant. The Electronic Payments Coalition estimated debit card issuers lost $106 billion in interchange revenues in the first 10 years under Durbin.
A 2015 study by the Federal Reserve Bank of Richmond, however, found little evidence merchants were passing along those savings to customers. In fact, 21.6 percent of merchants surveyed by the Richmond Fed had actually raised prices, while 77.2 percent kept prices the same.
Of course, it's tough to quantify merchant savings given the array of interchange rates and pricing structures. "The regulation assumes everybody is on interchange-plus," said Elaina Smith, COO at Secure Bancard. "But interchange is a very narrow piece of card acceptance costs."
Smith noted that merchants on flat pricing, for example, didn't see any changes post Durbin, while those with mostly small tickets saw costs soar. At 22 cents, the interchange on a $5 cup of coffee works out to about 4 percent.
Many consumers also took financial hits when FIs raised account fees and scrapped rewards programs to recoup lost interchange revenue. A 2012 study by the Discover-owned EFT network Pulse, for example, found half of FIs covered by the law had ended their debit card rewards programs in the first year under Durbin caps.
In recent letters to members of Congress, groups representing all manner of FIs and payments companies warned of a repeat performance of the Durbin aftershocks if the Credit Card Competition Act becomes law. "This bill is not borne of real needs in the American payments system. It's about Congress picking winners and losers," one coalition of financial services trade groups wrote to members of the House.
James Huber, an attorney with Global Legal Law firm, doesn't discount that possibility. "Sen. Durbin has it out for Visa and Mastercard. He thinks they're too big" to be competitive, Huber said. That's why, he added, the Credit Card Competition Act addresses network processing, with the goal of driving down merchant fees.
Retailers are ecstatic. The Merchants Payments Coalition said it "would bring much-needed relief to retailers and American consumers by simply requiring that Visa and Mastercard were no longer allowed to be exclusive networks." In addition to lower fees, MPC said, the legislation "would introduce much-needed redundancy protection into the system."
Perhaps, but most experts agree it would take years of arduous effort for any alternative network to be built that connects millions of acceptance locations, and the connections will need industrial-strength security.
"Thinking about this makes my head spin," Smith said. "I think it will create a lot of complexities, and we already operate in an environment with a lot of complexity." "I'm really struggling to understand how this will work," said James Shepherd, whose company ISO Amp has analyzed hundreds of thousands of merchant statements. For starters, Shepherd noted, "No technology infrastructure exists to support taking a transaction from one network and sending it to another."
If the intent is to get regional EFT networks into the game, that's not going to work, Smith noted, since they were built as single-message networks and credit cards require dual-message capability (a preauthorization followed by payment). And what about chargeback rules? "I don't know of any other network that does all the things the [Visa and Mastercard] do," Smith said.
Another important consideration: Visa and Mastercard aren't known for system failures. Individual processors may go down from time to time, but not the card networks. Once Visa and Mastercard have to start linking to new networks it creates potential vulnerabilities.
Huber recalled how a major processor went down multiple days several years ago, and it created significant angst among ISOs, agents and merchants. Should a network fail, "It has the potential to be a nightmare," Huber said, adding, "This is complex stuff. Most people don't know how Visa and Mastercard work."
EPC, which includes Visa and Mastercard as members, is angling to change that with a public relations campaign, and a website (handsoffmyrewards.com) with an explainer video on the clearing process and encourages consumers to tell lawmakers , "Hands off my rewards." Several news outlets have picked up the call to action. "It's important for us as an industry to speak up," Smith said.
Patti Murphy is senior editor at The Green Sheet and co-host of the Merchant Sales Podcast. Follow her on Twitter @GS_PayMaven.
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