Will Increasing Regulation of the Acquiring Industry Abroad Affect the U.S. Market?

By Jim Daly

The Canadian government’s move last week to strengthen its Code of Conduct for the payment card industry and the European Union’s approval in March of rock-bottom interchange rates for credit and debit cards has observers wondering if more regulation is in store for the U.S. merchant-acquiring industry.

The United States does have its Durbin Amendment that puts a price cap on the interchange big banks can receive on debit card transactions. The amendment, part of the 2010 Dodd-Frank Act, also created debit card transaction-routing requirements intended to give merchants more choice among debit networks. By and large, however, the U.S. payment-card industry has escaped the type of regulation affecting cards in other countries.

But there are plenty of ideas for U.S. lawmakers and regulators to consider should they decide to increase their scrutiny of payments issues, according to a story in Digital Transactions magazine’s upcoming May edition. A 2014 survey by the Federal Reserve Bank of Kansas City identified a growing trend by governments to intervene in the payment card industry to correct a host of perceived problems, including allegedly overly-high interchange rates and restrictive network rules for merchants.

The survey documented 38 countries where public authorities intervened in or began investigations of networks’ interchange or merchant-service fees. A few such actions began in the 1990s, but most started in the 21st Century, with seven beginning in 2010 or later.

Governments also intervened in or launched investigations of no-surcharge and non-discrimination rules in 36 countries, according to the survey. All but eight of those investigations have begun since 2005. “We’ve definitely been seeing a lot more of this activity,” says Kevin Hodges, chief financial officer of EVO Payments International, a merchant processor based in Melville, N.Y., that also operates in Canada and Europe.

Few observers believe Congress intends to extend Durbin-like regulations to credit cards. The Durbin Amendment forced Congress to choose between two key constituencies, retailers, who generally supported the restrictions, and banks, which strongly opposed them, and lawmakers don’t want a repeat. The amendment was a small part of Dodd-Frank, which was meant to address mortgages, banks investment policies and other issues raised by the financial crisis of 2008.

“The conditions that were present for the Durbin Amendment were kind of unique and unusual and hard to replicate,” says Marc Abbey, managing director of Annapolis, Md.-based First Annapolis Consulting Inc.

That doesn’t mean the U.S. card industry can rest easy. The Consumer Financial Protection Bureau, another creation of Dodd-Frank, has been particularly active in 2015 regarding payments. In a federal lawsuit filed in April against a group of allegedly fraudulent debt-collection companies and their owners, the CFPB also named as defendants the big merchant processor Global Payments Inc. and three independent sales organizations for their roles in providing payment services to the debt collectors. PayPal Inc. also recently reported that the CFPB might sue it over its credit products. And the CFPB has proposed sweeping regulations on prepaid cards.

At the state level, one of the more recent ideas is to exempt merchants from paying interchange on the state and local tax portion of payment card sales. Bills to such effect have been proposed in Colorado, Nebraska, and Arkansas. The one in Colorado was killed in early March, but the potential for card-pricing regulations in states never seems to go away. “It’s safe to say the effort to try to affect the current level of interchange has moved from Washington to the states,” says Scott Talbott, senior vice president of government affairs at the Washington, D.C.-based Electronic Transactions Association.

The payment card industry also faces antitrust challenges from time to time. Most recently, American Express Co. said it plans to appeal a judge’s ruling in a case brought by the U.S. Department of Justice that its anti-steering rules for merchants are anti-competitive. But the Kansas City Fed study says the worldwide trend is moving away from antitrust actions and toward more activity by regulators, such as central banks or other agencies, which are perceived to be more flexible in payments issues than antitrust actions.