Is Everyone Ready for Durbin II?

The U.S. Senator’s bill to regulate credit card costs on behalf of merchants has stirred passions not seen since…the Durbin Amendment.

All the major card-issuing banks must be asking themselves by now what Democratic Senator Richard Durbin of Illinois has against them. Like some old Hollywood horror-film refugee, the Senator has returned, as it were, from a frozen state of 12 years’ time to press the brakes on what the big banks can earn on credit card interchange.

But, unlike Durbin’s foray into the debit card market years ago, he isn’t proposing this time an outright cap on the fee issuers earn on each transaction. Instead, the bipartisan bill he and Sen. Roger Marshall, R-Kan., unveiled in late July would require that all banks with $100 billion or more in assets offer acquirers a choice of two unrelated networks for routing.

If one network is Visa, the other can’t be Mastercard. The hope is other networks, including debit card systems like Pulse or Shazam, will compete for the business, driving down transaction costs for merchants.

Merchant advocates who have long pressed for regulation of interchange profess satisfaction that the bill, known as the Credit Card Competition Act of 2022, will finally put a stop to what they see as runaway acceptance costs for credit cards. “This is a broken market. Visa and Mastercard set the bank fees…they have such large market share, they get away it,” says Doug Kantor, general counsel for the National Association of Convenience Stores, an Alexandria, Va.-based trade group that has made action on interchange a top priority.

Credit card interchange rates are set by the networks and repriced by acquirers, with a markup, to merchants in what is known as the merchant discount rate. Interchange rates currently can range from a low of 1.3% up to 2.9% of the sale, depending on the network and a host of other factors.

But opponents of the bill are equally adamant it will wreak havoc, upsetting a delicate balance established by the interactions between cardholders, merchants, acquiring processors, and card issuers. “The bill is a back-door price control,” argues Jeff Tassey, executive director of the Electronic Payments Coalition, a Washington, D.C.-based group that represents card issuers.

Tassey adds if the bill becomes law, it will threaten the ubiquity of card acceptance, on which the industry—and consumers—depend. It will also threaten the popular cardholder programs consumers have flocked to over the years, he argues. “Where are you going to get the income for rewards?” he asks, if interchange income declines.

‘Major Questions’

At first glance, it might seem the bill is much ado about very little, given that it would apply only to the 33 U.S. financial institutions with assets exceeding $100 billion (chart, page 17). But those banks issue the vast majority of cards. And though Visa and Mastercard are independent corporations, they were until only a decade ago owned by many of these same big banks.

Some critics question whether there are enough alternative networks willing to step in as a sort of “side B” choice for merchants should the bill become law. “In the real world there are major questions about how this would play out,” notes Ted Rossman, senior industry analyst at Bankrate.com. “Who would step in, who is the second, unaffiliated network? Would the juice be worth the squeeze? The fact they haven’t done it yet might be telling.”

“They” in this context typically refers to the networks that route debit card transactions originating online and from merchant terminals. Most if not all of these systems have been offering PINless debit and signature debit services for years, leading many observers to figure they are equipped—if not eager—to step in as Sen. Durbin’s alternative network for credit card transactions.

Digital Transactions contacted several of the national electronic funds transfer networks for this story. All but Shazam, an Iowa-based network known for its independence and history of innovation, declined to talk about the pending legislation. A spokesman for the network, however, was noncommittal about the bill.

Indeed, for these networks, the controversy raised by the Durbin-Marshall legislation is almost old news. “This discussion has been floating around for at least five years. It shouldn’t be a surprise to anybody that the idea has been raised,” says a spokesman for Shazam.

And there’s some unfinished business lingering around Durbin’s first foray into payments that the spokesman says Shazam would like to see resolved before the network could address the Senator’s latest payments bill. That’s a reference to the Durbin Amendment, a 12-year-old set of debit card rules that cap interchange for issuers with more than $10 billion in assets and mandate a choice of networks for each transaction.

Many merchants have complained for years that big acquiring processors and issuers have largely blunted the intentions of the law by, for example, automatically shuttling e-commerce transactions to Visa and Mastercard on the grounds that lesser-known networks don’t offer the same security technology, a contention the alternative networks dispute.

“Some years ago, we weren’t talking about e-commerce, tokenized transactions, Apple Pay, and so on,” the Shazam spokesman says. “So making rules that allow for innovation that has happened is important.” Tokenization is a technology that masks actual card account numbers with symbols that would be unintelligible to cyberthieves.

‘Competition Is Good’

Meanwhile, on the larger issue of credit card routing, there could also be a divide opening between the biggest bank card issuers and smaller community banks, some of which at least aren’t entirely unsympathetic to Durbin’s latest bill. The idea of competition—a notion enshrined in the title of the bill—appeals to some top executives.

“All competition is good. That’s how I’ve grown up,” says Michael Bilski, chairman of the North American Banking Co., which has five locations in Minnesota. Bilski is also chairperson of the Faster Payments Council, which brings together merchants, bankers, processors, and technology companies. But at the same time, he adds, “I hate to say I’m in favor of any legislation that tells us what to do. I go both ways on this, I guess.”

Comments from others aren’t quite as hedged. The Durbin-Marshall bill “sounds like a big step forward in containing the control Visa and Mastercard have” over acceptance costs, notes Bob Steen, chairman of Bridge Community Bank in Mount Vernon, Iowa. “Visa and Mastercard just dominate this thing, and merchants should have the right to route [credit card payments] however they want.”

Steen, who has long been active in the payments industry, 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.

Digital Transactions reached out to both Visa and Mastercard for this story. A spokesperson for Visa did not respond. A Mastercard spokesperson initially responded but the contact ultimately did not lead to an interview.

A Routing Revolution

Transaction costs aside, if the Credit Card Competition Act ultimately wins passage, some informed observers argue it could lead to a revolution in how card payments are routed and processed. They 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.”

Mott underscores what he hopes will be 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,” he argues.

Opponents to the bill are optimistic they can block its passage into law. But they point out Durbin is a crafty veteran of the Senate who steered his debit card restrictions through Congress years ago and may well succeed now with his new credit card rules.

“If we do our job, I think we can block [the Credit Card Competition Act],” notes the EPC’s Tassey, but he warns the bill’s prospects could improve if it becomes part of a larger “must-pass” bill. That, he says, would make it harder to stop, particularly if the wrangling extends into December, when members simply want to put an end to debate and adjourn.