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Co v er St o r y
CoverStory

Déjà vu all over again? Beginning in the 1980s, Visa and Mastercard used
"incentive" interchange pricing to entice merchants to part
In that letter to leaders of the House and Senate, the eight with their old knuckle busters and install POS devices.
trade associations and the Electronic Payments Coalition Merchants that installed terminals saw interchange
argued the plan is "flawed and in need of scrutiny of rates halved, from 4 percent to 2 percent, said long-time
regular order in the respective committees of jurisdiction" industry insider Don Apgar. The card companies have
rather than being tacked on as an amendment to other, used the same tactic in the past to engage new categories
unrelated legislation. of merchants and to drive additional volumes through
their respective networks.
"The federal government's attempt to impose price
controls by regulating interchange through [the Durbin With time, interchange rates became too numerous
Amendment] is the purest example of failed government to easily count, and by the early 2000s, they became a
policy. Congress should not double down on this failure," flashpoint for merchants. A class action lawsuit, filed in
the letter added. 2005 on behalf of 12 million merchants, alleged Visa and
Mastercard violated federal antitrust laws by conspiring
The Durbin Amendment led to the capping of interchange to fix interchange at excessive levels. The lawsuit ended
on debit cards issued by financial institutions with over $10 with a $6 billion-plus out-of-court settlement that was only
billion in assets. (At the time $10 billion was the big bank officially upheld by a federal appeals court in March 2023.
threshold.) The cap, set by the Federal Reserve, is 24 cents.
Prior to the Durbin Amendment, debit card interchange The settlement also resulted in Visa and Mastercard
averaged around 44 cents. According to a 2022 Fed report, dropping rules against merchants adding surcharges to
debit card interchange collected by issuers exempt from credit card payments. Several years earlier, the card brands
the Durbin cap averages 52 cents. settled antitrust cases lodged by the U.S. Department
of Justice and several state attorneys general, dropping
Back in 2010, Durbin and retailers insisted a debit card opposition to merchants encouraging customers to use
cap would save merchants billions of dollars, which in specific card brands, or card types (for example, non-
turn would get passed along to consumers through lower rewards card or PIN debit).
pricing. But a Fed survey in ensuing years found very few
merchants (2 percent) lowered prices once the regulation Despite the wins in the courts and Congress, interchange
took effect; the remainder either increased or left prices continues to raise the ire of those who pay the fees. In
unchanged. July 2023, Block, the company formerly known as Square,
sued Mastercard and Visa, alleging the two companies
The CCCA would almost certainly have other dire conspired to inflate interchange and befuddle merchants.
consequences, such as payments fraud and data breaches, "The fee is highly complex, difficult to calculate, and
opponents stated. Yet, as the second highest ranking unavoidable," Block stated in the lawsuit.
Democrat in the Senate, Durbin carries a lot of sway.
His job as Democratic Whip is to get other Democratic "As payments become more integrated into software, and
senators in line behind legislation the party wants passed. more assumed as a feature for which merchants have little
And while the CCCA amendment was not appended to bargaining power, it is likely that the cost of processing will
the NDAA, Sen. Marshall said in a July 26 statement that come under greater criticism and increased complaints
sponsors have been given assurances the bill will get a by merchants," said long-time industry consultant Mark
Senate vote "in this Congress," which continues through Dunn, who is founder and president of Field Guide
2024. Enterprises. But, overall, Dunn is optimistic. "Despite the
Ever changing landscape Durbin Amendment, the pandemic, the price competition
and other potential setbacks, electronic payments continue
Interchange has not always been controversial. After to chug ahead," he added.
all, there is a real cost to card-issuing banks when they
fund a cardholder purchase, making the transaction an New pricing models emerge
unsecured extension of credit that benefits the merchant. While the card brands dropped opposition to surcharging
credit card payments, as a condition of the legal settlement
In the early years of bankcards, which were awash with with merchants, the Durbin Amendment made clear
paper, it could take up to 45 days for an issuing bank to that card-accepting businesses can use incentives (like
get a statement out to the cardholder detailing purchases, discounts) to steer customers to certain methods of
recalled retired industry consultant Paul Martaus. The payment, like cash or PIN debit.
cardholder then had 30 days to pay off the balance before
interest kicked in. "With online POS terminals, the entire Credit card surcharging was explicitly endorsed when
payment processing mechanism sped up so dramatically the U.S. Supreme Court ruled, in 2017, that New York law
that issuing banks could provide cardholder statements prohibiting merchants from adding a surcharge to credit
almost overnight," Martaus said. card payments was an unlawful restriction on free speech.

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