The ongoing legal debate about lack of competition around payment card pricing is reigniting, as merchants complain about the painful effects of recent card network swipe-fee hikes on top of rising inflation.
Sen. Dick Durbin, D-Ill.s, author of the namesake amendment to the Dodd-Frank Act that capped debit card interchange fees — a core component of the costs merchants pay when accepting card payments — this week floated changes that could have the effect of extending certain provisions of that legislation to credit cards.
Though observers don't expect a major swipe-fee overhaul in the immediate future, government intervention into payment card fees seems increasingly likely within the next year, after more than a decade of stasis.
In a hearing convened in the Senate Judiciary Committee on Wednesday with representatives from the card networks, merchants and banking industry, committee chair Durbin called for greater transparency in how the card networks set interchange rates and said merchants deserve more choices in how in-store and online payment card transactions are routed.
A clear trigger for the hearing is the fact that Visa and Mastercard increased certain interchange rates last month after a two-year delay during the pandemic.
Merchants ran an
"We're suffering from inflation. We asked them not to" raise swipe fees. "They didn't listen," Durbin said.
Much of the two-hour discussion during this week's hearing focused on how payment card networks set interchange fees that merchants pay to banks, while retailers have no opportunity to negotiate. Credit card interchange averages about 2.2% of each transaction, but certain higher-end rewards cards carry steeper swipe fees.
As the proportion of credit and debit card transactions continues to rise, merchants are paying more each year in fees that are not subject to fair competition, according to Durbin.
Part of the previous legislative solution to this issue was to allow merchants to get a choice of debit-routing options at the point of sale. This same approach could be required for credit cards if legislators deem it appropriate to do so.
“Let’s give merchants a choice of card network options on each swipe and each online sale,” Durbin said.
Durbin didn’t specify how card networks and issuers could approach the complex prospect of rewiring systems to allow network-routing choices on revolving credit cards, which differ sharply from debit transactions where payments are deducted directly from specified bank accounts.
The debit network routing changes that took effect in 2011 required extensive negotiation and engineering so that merchants have the option of two unaffiliated debit networks. In-store debit card interchange rates were also capped at that time at 0.05% of the transaction plus 21 cents, exempting financial institutions below $10 billion of assets.
Durbin now suggests that credit card issuers could be required to disclose interchange fees on consumers’ monthly statements to spotlight the fact that higher-end rewards cards carry higher interchange fees.
“Maybe if consumers knew how much their cards were costing their favorite restaurants and retailers, they’d use less costly cards,” he said during the hearing.
Durbin also said he'd like to see sales tax excluded from the total transaction amount upon which interchange fees are calculated. “That’s a swipe tax on top of a sales tax,” he said.
Laura Karet, CEO of the Pennsylvania-based supermarket chain Giant Eagle, testified at the hearing that the credit card interchange increases Visa and Mastercard imposed last month will cost the company $1.3 million a year.
“Visa and Mastercard are the only vendors that Giant Eagle cannot negotiate with,” Karet said.
Testifying as the general counsel for the National Association of Convenience Stores, Doug Kantor said that credit card interchange has risen out of proportion to merely covering card fraud and promoting efficient electronic payments.
“The card networks have an ‘honor all cards’ rule that says to merchants if you take any single Visa or Mastercard you must take every single one and the [swipe fees] on these cards can be incredibly different for these businesses. They can be factors of twice or three times as high" as the average interchange rate, Kantor said.
Inflation has exacerbated the effects of credit card interchange on merchants — particularly smaller merchants — and consumers, Ed Mierzwinski, senior director of consumer programs at U.S. PIRG, said during the hearing.
“When prices go up because of inflation, the bank earns more money without doing anything or without making anything,” Mierzwinski said.
Even cash-paying customers are indirectly forced to cover higher interchange costs when merchants raise merchandise prices to cover higher swipe fees, according to Mierzwinski, who suggested that the U.S. should follow the examples of Europe and Canada, where government agencies regulate interchange fees.
“I believe Europe’s rates under interchange fee regulation are about 10% of U.S. rates, which are not really restrained. That’s why we needed the Durbin amendment [for debit cards], and that’s why we need to expand the Durbin amendment,” Mierzwinski said.
Charles Kim, executive vice president and chief financial officer of Commerce Bancshares in Kansas Citi, Missouri, argued that banks and credit unions invest billions annually to make the electronic payments system secure. Merchants’ contribution via interchange is only a fraction of that cost, according to Kim.
“I believe both banks and merchants should share in the cost of the payment system,” Kim said, noting that price controls in the form of interchange regulation would likely harm all parties using credit cards.
Visa’s representative at the hearing, Bill Sheedy, said recent "targeted" interchange rates increases were focused on enhancing security and integrity of the network. Visa also recently
“At the outset of the pandemic we lowered interchange rates for certain key segments including grocery stores, restaurants and education, and in April, we lowered interchange rates for the majority of U.S. businesses,” Sheedy, senior advisor to Visa Chairman Al Kelly, said during the hearing.
Linda Kirkpatrick, president of Mastercard’s North America operations, said Mastercard’s recent interchange changes had a net neutral effect on pricing.
“After a two-year delay resulting from the pandemic, we implemented changes to our default rates, which included some increases and some decreases, including for small merchants,” she said.
Many of merchants’ gripes about interchange rates are not new, but inflation has exacerbated their pain, said Patricia Hewitt, president of PG Research & Advisory Services.
One possible outcome of the latest hearing is that financial regulators might for the first time require the card networks to share the detailed metrics they use to set default interchange rates, Hewitt said.
“That would be a step in the right direction,” she said, noting there are collateral risks to capping payment card interchange. For example, decoupled debit cards — which come from a third party such as a merchant instead of directly from the bank that they're linked to — became less sustainable as a business after debit interchange was capped.
“Just like the decoupled debit market collapsed after the Durbin amendment was implemented, the same could happen to the fintech credit card market, which relies on a lot of smaller banks for issuing licenses,” she said.
The debate around interchange has swirled for years despite major changes in technology and the competitive landscape, said Eric Grover, a principal with Intrepid Ventures.
“Notwithstanding Mastercard’s and Visa’s leading positions, there’s plenty of competition in the U.S.’s credit card market, with American Express, Discover, Star, NYCE, etc., and you have to consider PayPal and the wave of burgeoning buy now/pay later systems like Affirm, Klarna, Afterpay and Zip, plus nascent open-banking systems emerging around companies like Plaid and private-label credit cards as well,” Grover said.
Jaret Seiberg, an analyst in Washington with the equity research firm Cowen, said in a research note published Wednesday that it’s unlikely Congress is poised to regulate credit card interchange rates in the current legislative cycle.
But it's possible the Federal Reserve will confirm a recent proposal to expand debit network routing choices to cover online transactions as well as in-store transactions, following a surge in e-commerce over the last several years, according to Seiberg.
“Banks continue to be on high alert for any movement on interchange,” he said.
Eight banking industry organizations including the American Bankers Association, Consumer Bankers Association, the Credit Union National Association and the Electronic Payments Coalition collaborated on a letter to Durbin and the Judiciary Committee to express their strong opposition to any expansion of the Durbin amendment through antitrust or any other body of law.
