How Trump's election win will change payments

Andrew Harrer/Bloomberg

The Republican party's lurch to the populist right has changed the traditional script for payments industry deregulation, which is bad news for credit card interests hoping for less antitrust pressure, but good news for those hoping to cash in on cryptocurrency.

While Donald Trump's election and Republican control of at least the Senate portends a reduced government role in setting guardrails for business, the payments industry is different, not settling into a predictable partisan divide.

"Many people assume that a Republican administration will bring a lighter and less political approach to regulation, be less inclined to intervene, and therefore will be better for the payments industry and financial services," said Eric Grover, a principal at Intrepid Ventures. "But a dollop of caution is merited. MAGA Republicans aren't always stalwart defenders of free markets."

Trump and the Republicans may push policies that will lower barriers for large bank mergers and collaboration between banks and technology companies, restructure the Consumer Financial Protection Bureau, and favor private solutions to issues such as digital payments and financial inclusion. But the extent of the change is unclear due to a general dissatisfaction with centralized power that crosses political barriers.

 "The sentiment that big is bad…and that the private sector and free markets can't be trusted has increasing influence in both parties," Grover said. 

A matter of antitrust

There are several legislative and legal moves designed to curtail the power of the credit card that have advocates on both political sides, so these efforts are likely to continue or even accelerate.

During the campaign, Trump called for a temporary 10% cap on credit card interest rates, an unlikely move that nonetheless suggests an adversarial approach to the credit card industry.  

"Interchange fees appear to be a rare area where the usual partisan divides fall apart," said Aaron Press, research director of worldwide payment strategies for IDC. "There are bi-partisan coalitions on both sides…The shift in Congress is fairly small in terms of numbers and isn't likely to change that calculation very much.

"There is bipartisan support for legislation to restrict credit card companies. The Credit Card Competition Act would require credit cards issued by banks with more than $100 billion in assets to offer merchants the choice between two unaffiliated card networks–at least one of which cannot be Visa or Mastercard.

Fintech

Trump win unlikely to stop the crackdown on BaaS and fintech

November 8, 2024 3:38 PM

That would extend the Dodd-Frank law that was passed following the 2008 financial crisis, requiring two options to route debit cards, with at least one not being Visa or Mastercard.

Sens. Richard Durbin, D.Ill. and Roger Marshall, R-Kan are the co-sponsors of the bill, which has been referred to the Senate's Committee on Banking, Housing and Urban Affairs.Durbin and Marshall have recruited co-sponsors, including Sens. Josh Hawley, R-Mo., Jack Reed, D-R.I., Peter Welch, D-Vt., and J.D. Vance, R-Ohio, the Vice President-elect.

"It's also worth noting that fees have become a less substantial component of card lenders' revenue, with APR margin rising steadily since 2018," said Guanyu Zhou, a researcher at the Wharton School at the University of Pennsylvania, suggesting the pushback against fee restrictions may be less than in the past. 

Visa and Mastercard earlier this year reached a settlement to lower interchange fees, though a judge later rejected the deal. Both card networks criticized the ruling, but also said they were willing to negotiate a new settlement to avoid a lengthy and costly court battle.  

Since many of the measures to tighten rules for credit cards are popular with consumers, they won't necessarily be dumped simply due to full Republican control of the government. The CFPB earlier this year cut the cap on late fees for credit card payments from $32 to $8. 

And the Department of Justice in September sued Visa, alleging the card company has monopolized the American debit card industry by making it harder for rivals to compete. 

The DOJ suit follows a multiyear investigation to determine if Visa has made it difficult for merchants to choose the lowest possible option to route debit card transactions.

"I don't think the Department of Justice will drop its case against Visa over the debit card market," McPherson said. "Likewise, I don't see a change to the Credit Card Competition Act…and the CFPB's cap on credit card late fees is likely to remain in place as a popular measure. So the celebration taking place in the banking industry may be premature."

Crypto…but not from the government

The cryptocurrency industry in recent years has tacked to the right, a result of politicians and wealthy donors seeking common cause, and the traditional libertarian bent of cryptocurrency.

For example, Block CEO Jack Dorsey this week expressed hope that the new administration would make it easier to expand bitcoin mining. The Trump family recently started a cryptocurrency company and JD Vance reportedly owns up to $500,000 in cryptocurrency.

The crypto markets seem enthusiastic about his election, and Trump himself has interests in crypto, so this suggests a more supportive regulatory environment for crypto than there has been for the last four years, said Aaron McPherson, a principal at AFM Consulting, noting that technology billionaires like Elon Musk and Peter Thiel will have influence with the incoming administration.

But government-supported digital assets, such as a central bank digital currency or a digital dollar, are a different matter. In the U.S., CBDCs have gotten caught up in larger political fights over the general role of government.  "Republicans have resisted CBDCs and often equated them to surveillance," Press said. "At the same time, the blockchain cryptocurrency industry has become more aligned with Republicans."

While there are dozens of CBDC projects underway globally, progress in mature banking markets has been slow due to a lack of clear use cases and concerns from banks that a CBDC would drain bank deposits.

"CBDC creates risks of disintermediation, and large banks in the U.S. are quite powerful, as well as payment companies like Visa and Mastercard," said Sergey Sarkisyan, assistant professor of finance at The Ohio State University's Fisher College of Business.

CBDCs have mostly taken hold in China and smaller countries that do not have a mature banking system. Other countries more similar to the U.S. such as Canada and Australia have halted work on CBDCs, while work in the European Union and the U.K. has remained stalled.

"The prospects for a CBDC have been extinguished for now, because Trump will not want to give the Federal Reserve more power than it currently has, and will be influenced by those who want a private sector solution," McPherson said.

Large banks have increasingly expressed interest in deposit tokens and other forms of stablecoins, and will start to work behind the scenes as infrastructure for cross-border payments, McPherson said. "So we may end up with a lot of the benefits of a CBDC without an actual CBDC," he said.