By Patti Murphy
Stop me if you have heard this story before. A group of lawmakers, lobbied by large retailers, attempt to ramrod through Congress a bill regulating the business of card acquiring by offering the bill as an amendment to other urgent legislation.
That is how the Durbin Amendment regulating debit interchange became part of the Dodd-Frank Act in 2010. And it is a tactic Senator Durbin has tried again, offering the Credit Card Competition Act as an amendment to the National Defense Authorization Act. (He failed this time.)
The NDAA funds activities of the Department of Defense and important national security initiatives. The CCCA would require the largest banks ($100 billion or more in assets) to make the credit cards they issue usable on at least two processing networks—only one of which can be owned by Visa or Mastercard—that merchants can choose from for processing.
Alternatives might include the American Express and Discover card networks, or ATM networks like Shazam and Star, the expectation being these might be cheaper. "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 the credit card market," Sen. Durbin said in a statement.
Durbin has bi-partisan support for the legislation, with co-sponsors Senators Roger Marshall, M.D., R-Kan., J.D. Vance, R-Ohio, and Peter Welch, D-Vt.. Similar bipartisan legislation is pending in the House.
Opposition to the bill is strong among card issuers and the card brands. "We urge you to reject this cynical manipulation of our nation's payments system for narrow financial gain for the nation's largest retailers," a group of eight bank and credit union trade associations wrote in a letter to House and Senate leaders.
Meanwhile, Politico reported that Alfred Kelly, executive chairman of Visa, paid a visit to Capitol Hill hoping to dissuade potential co-sponsors of the CCCA, which was introduced as a free-standing bill in June. And the American Bankers Association has been running media blitzes in select markets, like Washington, D.C., and the sponsors' home districts, highlighting the potential damage the bill will do to rewards programs.
In that letter to leaders of the House and Senate, the eight trade associations and the Electronic Payments Coalition argued the plan is "flawed and in need of scrutiny of regular order in the respective committees of jurisdiction" rather than being tacked on as an amendment to other, unrelated legislation.
"The federal government's attempt to impose price controls by regulating interchange through [the Durbin Amendment] is the purest example of failed government policy. Congress should not double down on this failure," the letter added.
The Durbin Amendment led to the capping of interchange on debit cards issued by financial institutions with over $10 billion in assets. (At the time $10 billion was the big bank threshold.) The cap, set by the Federal Reserve, is 24 cents. Prior to the Durbin Amendment, debit card interchange averaged around 44 cents. According to a 2022 Fed report, debit card interchange collected by issuers exempt from the Durbin cap averages 52 cents.
Back in 2010, Durbin and retailers insisted a debit card cap would save merchants billions of dollars, which in turn would get passed along to consumers through lower pricing. But a Fed survey in ensuing years found very few merchants (2 percent) lowered prices once the regulation took effect; the remainder either increased or left prices unchanged.
The CCCA would almost certainly have other dire consequences, such as payments fraud and data breaches, opponents stated. Yet, as the second highest ranking Democrat in the Senate, Durbin carries a lot of sway. His job as Democratic Whip is to get other Democratic senators in line behind legislation the party wants passed. And while the CCCA amendment was not appended to the NDAA, Sen. Marshall said in a July 26 statement that sponsors have been given assurances the bill will get a Senate vote "in this Congress," which continues through 2024.
Interchange has not always been controversial. After all, there is a real cost to card-issuing banks when they fund a cardholder purchase, making the transaction an unsecured extension of credit that benefits the merchant.
In the early years of bankcards, which were awash with paper, it could take up to 45 days for an issuing bank to get a statement out to the cardholder detailing purchases, recalled retired industry consultant Paul Martaus. The cardholder then had 30 days to pay off the balance before interest kicked in. "With online POS terminals, the entire payment processing mechanism sped up so dramatically that issuing banks could provide cardholder statements almost overnight," Martaus said.
Beginning in the 1980s, Visa and Mastercard used "incentive" interchange pricing to entice merchants to part with their old knuckle busters and install POS devices. Merchants that installed terminals saw interchange rates halved, from 4 percent to 2 percent, said long-time industry insider Don Apgar. The card companies have used the same tactic in the past to engage new categories of merchants and to drive additional volumes through their respective networks.
With time, interchange rates became too numerous to easily count, and by the early 2000s, they became a flashpoint for merchants. A class action lawsuit, filed in 2005 on behalf of 12 million merchants, alleged Visa and Mastercard violated federal antitrust laws by conspiring to fix interchange at excessive levels. The lawsuit ended with a $6 billion-plus out-of-court settlement that was only officially upheld by a federal appeals court in March 2023.
The settlement also resulted in Visa and Mastercard dropping rules against merchants adding surcharges to credit card payments. Several years earlier, the card brands settled antitrust cases lodged by the U.S. Department of Justice and several state attorneys general, dropping opposition to merchants encouraging customers to use specific card brands, or card types (for example, non-rewards card or PIN debit).
Despite the wins in the courts and Congress, interchange continues to raise the ire of those who pay the fees. In July 2023, Block, the company formerly known as Square, sued Mastercard and Visa, alleging the two companies conspired to inflate interchange and befuddle merchants. "The fee is highly complex, difficult to calculate, and unavoidable," Block stated in the lawsuit.
"As payments become more integrated into software, and more assumed as a feature for which merchants have little bargaining power, it is likely that the cost of processing will come under greater criticism and increased complaints by merchants," said long-time industry consultant Mark Dunn, who is founder and president of Field Guide Enterprises. But, overall, Dunn is optimistic. "Despite the Durbin Amendment, the pandemic, the price competition and other potential setbacks, electronic payments continue to chug ahead," he added.
While the card brands dropped opposition to surcharging credit card payments, as a condition of the legal settlement with merchants, the Durbin Amendment made clear that card-accepting businesses can use incentives (like discounts) to steer customers to certain methods of payment, like cash or PIN debit.
Credit card surcharging was explicitly endorsed when the U.S. Supreme Court ruled, in 2017, that New York law prohibiting merchants from adding a surcharge to credit card payments was an unlawful restriction on free speech.
Today just two states—Connecticut and Massachusetts—prohibit surcharging, and a cottage industry has emerged to develop software and solutions that support "compliant" surcharging. Surcharging merchants must comply with myriad disparate state laws as well as card-brand rules. Among the more common requirements: clear signage, the surcharge amount has to be clearly stated on both customer and merchant receipts, and the fee cannot exceed the merchant's actual cost of acceptance.
Earlier this year, Visa lowered the permissible surcharge rate for U.S. merchants to 3 percent from 4 percent. Asked about the move during a July 25 call with analysts, Visa CEO Ryan McInerney said "It's no surprise that we don't feel great" about surcharging. The new cap, he responded, is to make sure "that when consumers do get surcharged it's something that's fair and equitable."
Surcharging, and its corollary, cash discounting, eliminate interchange as a merchant pain point, by shifting the cost to consumers who pay with bankcards.
These dual pricing arrangements are also good for ISOs and agents, as the residuals are substantially higher than with traditional pricing models, like tiered pricing and interchange-plus. Most cash discount programs, for example, assess a 4 percent charge on card payments, allowing for plenty of margin on transactions. "Cash discounting and surcharging have reinvigorated the industry, and have effectively derailed the race to zero," Apgar said.
These dual pricing arrangements "have made ISOs a lot of money and save merchants big bucks," Dunn said. "However, it seems the card brands are not too pleased with how these forms of cost-shifting have been implemented."
Dunn noted that some sponsor banks have been fined for dual pricing programs that do not comply with card brand rules. Visa is said to have dispatched secret shoppers to seek out non-compliant merchants and imposed fines on the acquiring banks.
"In the ISO industry we have a chain of responsibility for implementing compliant programs," Dunn said, adding there's a potential ripple effect when fines get handed out. "If ISOs and agents get stuck with fines because the merchants they signed up are out of compliance, it will have a significant effect on how the programs are sold and implemented," he said.
But sponsor banks differ, said James Shepherd, founder and CEO of ISO Amp, an SaaS solution for statement analysis. "Some pass the fines on; others don't."
Visa is especially disdainful of cash discounting programs that use "non-cash adjustments" at checkout. "A merchant offering cash discounts needs to go through and change the shelf pricing for every item to display both the cash and card price. Then, without question it would be compliant" in Visa's eyes, Shepherd said.
"Surcharging is not going away and neither is cash discounting," noted Ken Musante, of Napa Payments and Consulting. "What we are seeing is a codifying of how it can be done. This lends credibility and protection as it defines the acceptable practices and disclosures." 
Patti Murphy, senior editor at The Green Sheet, has been following and writing about payments for 40 years and has been working with The Green Sheet for 25 years. Patti is also co-host of the Merchant Sales Podcast. Follow her on LinkedIn at www.linkedin.com/in/patti-murphy-1082911.
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