Would a proposed credit card law be as costly as credit unions claim?

Credit union leaders argue that a proposal to reduce Visa and Mastercard's influence over credit card interchange fees would potentially cut off revenue needed to manage costs and protect transactions.

"Interchange income covers things like the physical cards, the processing fees, the systems that go behind being able to process the payments. It's not just the networks themselves, but all the systems that go into it," said Todd Mason, president and CEO of the Maine Credit Union League. The Credit Card Competition Act of 2022, introduced by Sens. Dick Durbin, D-Ill., and Sen. Roger Marshall, R-Kan., on July 28, is aimed at lowering interchange by requiring more options to process payments. 

The bill does not directly apply to credit unions or banks with less than $100 billion of assets, but credit union lobby groups say a forced reduction in interchange fees indirectly pressures other community-based financial institutions as well. The criticism is similar to pushback against a debit routing provision in the Dodd-Frank law that was passed after the economic crisis of 2008. That provision, part of what's called the Durbin amendment, required more choices for merchants when routing debit card payments.

"The idea" of the Credit Card Competition Act of 2022 "is that it gives merchants choice, it fosters competition and tries to break up what's perceived as a duopoly held by Visa and Mastercard, which are the two largest networks in terms of transactions," said Zilvinas Bareisis, head of retail banking for the Boston consulting firm Celent. "Certainly for credit cards, they have the lion's share of transactions, so the idea is to introduce more competition."

Visa and Mastercard did not respond to requests for comment before deadline.

The new Durbin/Marshall bill would direct the Federal Reserve to create regulations that would require financial institutions with more than $100 billion of assets to support at least two networks for processing open-loop card transactions, including one that is not from the top two firms. 

The bill was first hinted at during a hearing convened in the Senate Judiciary Committee in May. 

"Convenience stores, gas stations and other small businesses … are being taken advantage of by Visa and Mastercard on behalf of big banks in New York City at a time when they, and the communities they serve, are grappling with crippling inflation and staring down the barrel of a looming recession," Marshall said in a press release. "Competition is the heartbeat of capitalism and that is what our bill will create, competition."

Payments

Interchange bill could cut fees for the largest credit card issuers

July 28, 2022 7:27 PM

Despite pushback from smaller financial institutions, experts with the National Association of Convenience Stores and the Merchants Payments Coalition are emphasizing the bill's focus on the larger organizations and the possible benefits for store owners.

Doug Kantor, general council for the convenience store group and a member of the payments coalition, explained that costs can be lowered by promoting competition among card networks and larger financial institutions.

"Our view is still that a competitive market is better for everyone, where smaller institutions like credit unions are already disadvantaged in the marketplace. … I think [credit unions] might welcome a more competitive marketplace that would potentially give them a better opportunity to compete when larger issuers would have requirements that they wouldn't have," Kantor said.

A February 2022 survey of industry groups, research organizations and financial institutions from the U.S. Governmental Accountability Office found that the 2008 Durbin amendment had a profound impact on how the depositories offered basic banking services over the past 10 years. Supplementary research cited by the GAO and conducted by the Fed found that certain banks liable under the bill raised the monthly service fees on checking accounts.

The National Association of Federally-Insured Credit Unions, the Credit Union National Association and other trade groups are relaying similar worries regarding the effect that new restrictions on interchange could have on financial institutions below the $100 billion-asset threshold. 

The Credit Card Competition Act shares many similarities with the Durbin amendment and as such, could see that same outcome transition from the debit realm to the credit market, said Greg Mesack, senior vice president of government affairs for NAFCU.

Card networks argue that interchange covers costs related to fraud prevention and other factors of handling card payments. Reducing interchange fees does not reduce this burden.

"The impact for credit unions is going to be lower interchange revenue, plain and simple. … In many ways, this is a replay of what we saw with" the Durbin amendment — "you're gonna see lower interchange revenues, but you've still got all of the obligations for fraud protection, security, card issuance and customer service," Mesack said. "This in turn could further shape how credit unions offer low-cost and sometimes free services to members."

Additionally, credit unions with smaller economies of scale that place an increased emphasis on income from consumer credit transactions could have to make up for reduced interchange revenue elsewhere.

"The largest credit card companies in the nation are banks, but [credit unions] are part of that payment processing ecosystem, and an impact in one area impacts all of us. … While we are not for profit, we still have expenses to keep the institutions open," said Jason Stverak, deputy chief advocacy officer for federal government affairs at CUNA. "In many instances, that could come down to cutting down hours or additional services."

The new bill continues the longstanding battle between merchants and financial institutions over interchange fees worldwide.