The Processor Reaction

Acquirers are trying to disentangle the many implications of the proposed Credit Card Competition Act. Some doubt the bill’s impact would be good.

This road has been traveled before. This time, U.S. Sen. Richard Durbin (D-Ill.) wants to place restrictions on credit card practices, specifically transaction-routing practices.

As Digital Transactions reported in September, the bill (introduced in 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, Shazam, or Star, will compete for the business, driving down transaction costs for merchants.

But while this credit card bill resembles a similar requirement for debit cards enshrined in the Dodd-Frank Act as the Durbin Amendment, it differs from that 2011 law in an important respect. The Durbin Amendment imposed caps on debit card fees applied to card issuers with more than $10 billion in assets as well as ordaining routing choice. This latest credit card measure only tackles routing choice.

Still, these laws have a way of taking on nuances over time. The Federal Reserve just in October said that Durbin’s requirement that issuers enable a choice of at least two competing networks for debit transactions also applies to card-not-present debit transactions.

Last month, Sen. Durbin tried to attach the credit card legislation, known as the Durbin-Marshall bill, to the National Defense Authorization Act, which sets the annual Department of Defense budget and must be passed by the U.S. Senate and House before President Biden can sign it into law. That effort fell short mid-month when the defense bill went forward without the credit card legislation attached.

Another Durbin and Marshall amendment, more focused on fees commissary users pay, would have required the Defense and Treasury departments to issue a report on surcharges some veteran classifications pay to use credit and debit cards in commissaries.

The Main Act

But the Credit Card Competition Act of 2022, as the credit card routing bill is styled, is the main act. Retailer groups, such as the National Retail Federation, have warmly welcomed the proposed law.

“Opening the business of routing credit card payments to new players will mean merchants and banks can now accept credit card networks that charge lower costs,” says Brian David Crane, founder of Spread Great Ideas, a digital marketing fund. The impact of the bill could mean businesses “will have far more options for choosing the kind of payment networks they have to deal with.”

While the card-competition amendment has generated scads of attention, its direct impact on acquirers might be restrained. Meanwhile, it could have broader implications for the overall payment card business.

Some processors claim the bill, should it become law, will have little or no effect on them. “From our point of view, it doesn’t really affect us much,” says Louis Hoch, cofounder and chairman of Usio Inc. “It won’t affect how we sell.” San Antonio-based Usio offers payment acceptance, funds disbursement, and related services to merchants.

But pull back a bit from the acquirer focus and the impact could be larger, he suggests. “It will only benefit the big retailers,” Hoch says, those that pay according to a cost-plus model of pricing. That credit card acceptance model assesses the interchange rate plus a fee for each transaction. Many smaller merchants pay a bundled rate and may lack the volume to negotiate a different rate scheme.

Hoch says the impact will hurt the infrastructure of the whole payment system. “Hopefully, it doesn’t pass,” he says. He ventures that should it be approved, the bill would just force income streams to shift. “The banks will find a different way to recapture that income,” he says. “What might get lost is the consumers may have the most harm because they could potentially lose benefits they’ve been relying on, like cash-back options.”

And while Durbin’s strategy of attaching the proposed legislation to a must-pass bill like the National Defense Authorization Act fell flat, the effort may also have exposed the legislation’s inherent weakness, some industry players say.

It is perhaps the realization the Durbin-Marshall bill wouldn’t be able to advance on its own that it was attached to the NDAA, suggests Jeff Tassey, chairman of the Electronic Payments Coalition, a card-industry lobbying group. “Just like the original bill, with Dodd-Frank, he has to find some other way to get this into must-pass legislation,” Tassey says.

He adds the bill could end up attached to an omnibus spending bill much later this year, he says. “They have another bite of the apple in the omnibus in the lame-duck session,” he says. The omnibus bill is intended to keep everything funded, he says.

‘Downstream Impact’

Attaching the Durbin-Marshall bill to crucial legislation like the defense-spending measure was a nice try, says Patricia Hewitt, proprietor of PG Research & Advisory, a Savannah, Ga.-based payments consultancy. Now, she says, rival global networks and large retailers are likely to be the beneficiaries if the bill passes into law on its own merits.

“The big winners are potentially AmEx and Discover, who stand to gain issuers as the only other two global card networks in the mix,” she says.

Hewitt says the impact could be limited since not all issuers would be affected by the law, “but the results may be similar.”

Her take is that the largest merchants will gain much from this legislation “since they will bring the card networks to the table and force pricing concessions including favored interchange fee rates.” And, like Hoch, she suggests a shift in costs may follow.

“Due to the technical impact these changes will force on the market, overall costs for all participants will rise,” Hewitt says. “However, I’m of the opinion that, especially with chips on all cards, it’s less onerous than it might have been if the industry was still dependent on magstripe, but there’s still a lot of downstream impact.”

That’s exactly where Hoch suggests the impact will be, should the bill become law. “If this goes through, it will only benefit large merchants that have the cost-plus model,” he says. “We won’t change our pricing.”

History could be instructive here. When the Durbin Amendment went into effect, many acquirers retained their pricing and bundled debit card transactions into one rate or a small number of rate pools.

‘It Will Never Stop’

And what about the impact on cardholders? Hoch does not see how the Durbin proposal will yield any savings for consumers. Instead, it will damage the cardholder’s experience with her credit card, he argues. “The issuer will recoup that income in a different way,” he says.

Spread Great Ideas’ Crane disagrees. The bill, if it passes into law would likely please most merchants, but it could also lead to systems that will work to the advantage of consumers, he suggests.

“This will surely appease merchants who have advocated for lower card-acceptance costs,” he says. “Yet, suppose the new card-processing alternatives, e.g., current debit-only networks, can provide similar rewards programs as consumers have always enjoyed with Visa and Mastercard with more secure and cheaper options. In that case, I believe consumers will be more than happy to adapt.”

But even if the bill passes, Hoch doubts the big merchant groups will cease their push for lower interchange and card-acceptance fees. “They would push to the point of card issuers paying them,” he says. “It will never stop. They will never be happy.”