Experts Differ on the Consequences of Durbin’s Latest Effort to Control Merchants’ Card Costs

With a pair of U.S. Senators preparing to introduce a bill that would allow merchants to process Visa and Mastercard credit card payments over other networks, payments experts reached by Digital Transactions News are sharply divided on the idea.

The bipartisan bill, sponsored by Richard Durbin, D-Ill., and Roger Marshall, R-Kan., is intended to foster competition for card transactions and drive down merchants’ processing costs, according to a story in The Wall Street Journal that first appeared online late Wednesday.

The bill, which would apply to cards issued by banks with asset sizes of $100 billion or more, was expected to be introduced as early as this week, according to the story. There were some 33 banks in the United States of that size as of 2020, according to figures from the Bank Policy Institute.

The proposal’s aim to inject competition into the business of routing credit card payments appeals to some observers who argue the two big card networks have long enjoyed a hammerlock on the business. Merchants have complained for years about the costs they bear to accept cards, particularly those branded by Visa and Mastercard.

Now, merchants aside, some small-bank executives feel the time has come to rein in credit card acceptance costs.

“It sounds like a big step forward in containing the control Visa and Mastercard have” over acceptance costs, Bob Steen, chairman of Bridge Community Bank in Mount Vernon, Iowa, tells Digital Transactions News. “Visa and Mastercard just dominate this thing, and merchants should have the right to route [credit card payments] however they want.”

Steen, one of the most prominent executives among smaller bank card issuers, adds that the new bill might also help to break up what he sees as an alliance between merchant processors and the two network giants. “The big processors don’t play fair,” he says. “Visa and Mastercard incent processors to route transactions their way.” Both networks maintain large operations focused on vetting and authorizing card transactions.

In accepting a credit card transaction, merchants typically pay a fee, called the discount fee, to their acquiring bank that covers a wholesale cost, called the interchange fee, plus a markup set by the bank. The merchant discount fee can run between 1.5% and 3.5% of each purchase—a levy merchants have long complained about.

Other advocates of the proposed Durbin-Marshall legislation argue the industry is much better positioned now with the technology to manage routing to third-party networks. “We know that cross-settlement of transactions can be very useful technically, as we’ve seen with tokenization,” notes Steve Mott, a long-time payments consultant and proprietor of BetterBuyDesign, in an email message. “Moreover, we now realize that we can effectively slice-and-dice transaction flows digitally.”

Tokenization was introduced by the networks a few years ago to fight fraud by replacing actual card numbers with symbols that would be useless to data thieves who might intercept them.

Mott also points to other benefits the bill’s sponsors are touting, chief among them sharper competition for merchants’ card transactions. “All businesses perform better with competition, and we’ve seen that with the Durbin Amendment’s impact on debit cards, which contrary to howls of distress by incumbents at the outset, works much better for everyone than before.”

Durbin proposed more than a decade ago to contain debit card acceptance costs by capping interchange for large banks and requiring that merchants have a choice of at least two unaffiliated networks for processing. The move ultimately became law as part of the giant Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

But not all experts are sold on Durbin’s latest move. The proposed legislation would bear comparison with Durbin’s debit rules in requiring a choice of credit card networks for merchants, a rule even merchants may come to regret, argues Eric Grover, proprietor of the payments consultancy Intrepid Ventures. “Consumers’ payment preferences reign,” he says by email. “This [bill] would change that.”

The bill is in its early days, and no one can predict whether it will pass into law, or whether, if it does, it will retain its current provisions unchanged. Advocates, however, like what they see so far. “Now comes credit routing, which—in time—will unfurl new ways to get those transactions done more safely and efficiently, and where all payments companies can aspire to build and manage their businesses in ways that the marketplace rewards. Hot damn!” says Mott.