Ken Musante leads Napa Payments and Consulting, which advises merchants, fintechs and other businesses on payments processing options, integration strategies and costs.
If the Credit Card Competition Act concept were to apply to ride-hailing apps, it would work something like this: Whenever I initiate a ride-sharing app with one of the two largest providers, the app would call two drivers from competing firms. Both drivers would compete to get to my pin drop faster and I could ultimately get to my destination quicker.
Never mind the additional cost this would create. The system would be less efficient and the costs would increase to accommodate half the drivers who do not get the fare. This is a silly idea, yet it is what the CCCA is proposing for credit card transactions.
In short, the CCCA would direct the Federal Reserve to implement regulations for the giant credit card-issuing banks and require they offer a choice of at least two networks over which an electronic credit transaction may be processed. Effectively, any Visa or Mastercard card would need to offer an alternate choice not named Visa or Mastercard.
Unlike the original Durbin Amendment passed in 2010, which required two unaffiliated debit networks, this bill applies to credit transactions. This means the consumer is accessing a credit product, not their own funds, and the draw is predicated on the approval, as well as regulatory constraints associated with consumer lending.
For the purposes of this article, let’s assume the banks to which this applies individually select the second network appearing on the card. The banks could, for example, choose Discover or American Express. In this context, unless Discover or American Express were to change their interchange fee schedule, there would be little benefit to the merchant. Consumers would be harmed, presumably, because if they wanted either Discover or American Express, they would have applied for such a card directly.
Card-present terminals and card readers would need a software update to provide a preference. Processors would need to be updated to allow for the functionality. Tokens and token vaults would need to be updated to reflect the alternatives, as would token-accepting devices. Merchants and their staff would need to be re-trained to understand that some credit products are eligible for alternative routing and others are not. And all of this would need to be paid for before any savings is realized. This is an enormous tax for limited gains.
If we play out the “happy path” for the bill authors, card networks would compete to be the second provider. But because the cards are issued to consumers, consumers select the card with the greatest rewards. Even if the second network has much lower interchange fees, the card will be shunned by consumers because of the lesser rewards. Perhaps very large retailers will be able to independently offer greater rewards when the card is used at their store, but how is that different from consumers who elect to have an airline card and then get extra points when they make purchases at the airline of their choice? Here, too, there would be an enormous system tax for limited benefits.
And, if there is merchant benefit, it will be the very largest merchants benefiting: Those that can implement their own card or rewards programs. All other merchants will bear the costs of the changes, but receive none of the benefits.
This bill is meant to lessen the reach and dominance of Visa and Mastercard, but it’s akin to traveling around the world to visit next door. I see payment friction and unexpected consequences. We could rename the bill, the Full Employment Act for Chip and Terminal Manufacturers and the Consultants who certify devices and software. Processors will have a very long roadmap just to ensure compliance.
To the esteemed sponsors, Sens. Dick Durbin and Roger Marshall, I say, “please study our industry further.” I do understand the regressive nature of interchange fees. The most affluent cardholders receive points, but the cost is paid by all consumers. If your aim is to lessen this disparity, put forth the details of how this bill would be enacted. Let the industry, consumers and card-accepting merchants provide feedback so we may all realize the benefits and costs.
Failing that, please enact a more direct law. For example, allow merchants to surcharge in accordance with processing costs. If you dislike the Visa and Mastercard duopolies, put some governance on their size or directly cap interchange fees. And before you consider me a shill for the card networks, consider this idea: Look into non-interchange pass-through fees. Those have been growing in breadth and amount faster than interchange fees and are a direct cost to retailers. They are paid to Visa and Mastercard, but are rarely discussed. Until then, for the love of God, please balance the budget.