The Credit Card Competition Act and the push for regulation

In July, Senators Dick Durbin and Roger Marshall proposed the Credit Card Competition Act of 2022 (“CCCA”). The CCCA would require Visa and Mastercard, currently the two largest credit card companies, to accept at least two unaffiliated payment networks for processing interchange fees. An interchange fee is the fee charged by banks to merchants who process credit or debit card payments. The fee covers the costs of accepting, processing, and authorizing card transactions. Senator Durbin used a similar strategy in the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which eventually got rid of debit card rewards. Many are concerned that if the CCCA be passes it will have a devastating effect on the credit industry.

How effective was the Durbin Amendment?

James Huber, a Partner at Global Legal Law Firm, discussed his thoughts on the Durbin Amendment of 2010 in a recent podcast. Mr Huber discussed whether   it was effective or ineffective and what the lasting impact was on the payments industry. Mr. Huber’s comments follow:

“It was especially beneficial to larger retailers. It hurt coffee shops. A $2 cup of coffee, when you could get one in 2010, had a 10% fee. The disastrous effects were felt by merchants when they were banned from giving bonuses for purchases made with gift cards. It worked since it created tremendous possibilities in the industry.”

“What it didn’t do is help consumers,” said James. “It is credited with banks lowering savings account rewards, like interest rates. And the merchants didn’t pass along those savings, almost wholesale. And the flat twenty-four cent debit fee was not helpful either.”

The maximum interchange fee for debit card transactions was set at $0.21 plus 0.05% of the transaction, including an additional charge for fraud detection of no more than one cent per transaction. One of the ways this regulation did help was to create cash discounting, says James. “It took a while to catch on, but it’s all the rage now, and this was borne out of Durbin. This, of course, didn’t bode well for fintechs.”

What is the CCCA and what type of regulations would it bring to the industry?

The CCCA was introduced as an amendment to a defense spending bill. Its aim is to lower interchange fees for merchants, eventually leading to cheaper prices for consumers. However, history shows that the main benefactors of such a rule would be large retailers rather than consumers. In other words, credit card rewards could become extinct.

If credit cards are subject to the same regulations, it could lead to increased prices for consumers.

Senators Durbin and Marshall proposed this regulation to enable newer alternatives to compete with established models. Merchants would be more inclined to select the payment network with the lowest cost — which would ideally result in customers experiencing lower prices. As James Huber explains, of the credit card processing fees that merchants pay, the interchange fee is paid to the card issuer, the payment network, and the payment processor. The proposed legislation would require card issuers with $100 billion or more in assets to open credit card transaction routing to at least one network that is not Visa or Mastercard.

An additional requirement would prohibit credit card issuers from imposing certain limitations on the routing of electronic credit transactions, such as penalties for failure to meet a specified threshold of transactions on a particular payment card network. The proponents of the Act indicate that the average “swipe fee” of 2.25% is seven times the amount retailers in Europe pay and five times more than those in China. Those against the Act state there would be a cost of reissuing cards and upgrading technology to accomplish this, and loyalty programs would die.

Do veterans disproportionately suffer from economic loss because of swipe fees?

Senator Durbin stated that “Veterans are being charged extra for commissary purchases because of these exorbitant fees”

According to James Huber the reality is that defense funding legislation is a must pass bill every year. James further states, “But there were nine hundred other amendments proposed and this one didn’t make it, so I read that they are going to strap it on to another bill next month. Putting it as a tagalong is a common practice, you bootstrap things on that could go either way in the hopes that senators will not want the blemish of voting against bills that help veterans”.

As to who the “other network(s)” where transactions would be routed if the Act passes, James suggested STAR, PULSE and Interlink. “But there will be private ones that come out to shine. Crypto networks that have the rails and capabilities could blossom here too,” said James.

What would be the impact of this new regulation on consumers?

According to James, the Act would not have much effect on consumers. “Retailers will pocket the cost. Maybe the discounting programs will lower prices a bit. The other issue is that the third party might be more abusive than Visa and Mastercard. They might hike rates, charge phantom fees, or worse.”  Remember, says James, “There’s not a lot of oversight here. We rely on Visa and Mastercard to set the Card Brand Rules. I’ve had multiple judges say, “Card Brand Rules, are those laws?”  The answer is no. And obviously data security would be a big issue. Although we don’t know how good Visa and Mastercard are doing (with security) anyway.”

Who will be the biggest winners and losers if the CCCA passes?

James Huber says “The biggest winners will be large retailers. The biggest losers will, as always, be the people that are already the biggest losers. Poor people that need credit cards and rely on credit rewards. The people against the Act say that it will kill rewards programs. Visa and Mastercard will be affected, but likely just by experiencing lower margins. I’m sure they’ll figure out a way to keep rolling. Having a cheaper alternative didn’t help consumers before.”

Having the competition sounds great, but is it?

James says “The issuing banks are probably the ones that will really take the hit because the Act might allow the ability to route around them. And that makes me think that it will never get anywhere. Bank’s might tighten up on issuing cards if they aren’t raking it in, which could be a problem, but there is a lot of competition that would likely spring up. The cost reduction could be 5 or 7 times. I mean this could be a wild-west situation for card agents. You could have the chance to offer a merchant a rate of 1%. But honestly, I’m all for it. Change is good, competition is good.”

Conclusion

While the Credit Card Competition Act of 2022 aims to cut interchange fees for merchants (supposedly resulting in lower prices for consumers), recent history shows that the biggest beneficiaries of such a rule would be big-box retailers. The Durbin Amendment of The Dodd-Frank Act of 2010 sets a historical precedent that when the government cuts revenue, someone else has to pay the price.

About James Huber

Attorney James Huber is a founding Partner of Global Legal Law Firm and a nationally recognized expert on payments processing law.  Global Legal Law Firm’s lawyers are familiar with the rapidly changing nature of electronic payments processing, and the ever-changing regulations involved, with decades of expertise in ISOs, processors, commercial collections, credit card brands, and other forms of electronic payment processing litigation. Let us guide you through this new and volatile environment, rather than attempting to navigate it on your own.