Ever since the Durbin Amendment upended the debit card industry in 2010, insiders have speculated that Sen. Richard Durbin (D-Ill.) would eventually pursue similar changes to the credit card industry.
Sen. Durbin made it known during a May 2022 Senate Judiciary Committee meeting that credit card reform was in his crosshairs. As inflation rose, he found a bipartisan partner in Sen. Roger Marshal (R-Kan.) and introduced bill S.4674, the Credit Card Competition Action of 2022.
This bill reflects many principles Reg II applied to routing, intending to increase competition and reduce merchant costs. If this bill becomes law, it will have significant consequences for issuers and consumers, potentially completely upending credit access as we know it today. It could also lead some issuers to dial back rewards and benefits.
What Would It Do?
The CCCA specifically targets Visa and Mastercard by changing network arrangements for issuers with more than $100 billion of assets. Those issuers would need at least two network routing choices, one of which is not Visa or Mastercard. If another network reaches top 2 market share, the prohibition against a combined Visa and Mastercard on one card would be eliminated.
The bill's sponsors believe that requiring a routing choice outside the two biggest networks would "inject real competition into the credit card market." They also think it will open the door for new market entrants, encourage innovation and enhanced security, create backup options if a network crashes, and exert constraints on Visa and Mastercard's fees.
Moreover, the proposal bars Visa and Mastercard from mandating exclusive relationships or inhibiting an acquirer, directly or indirectly, to direct transactions to another network. This could place significant limitations on how networks institute merchant pricing. In addition, Visa and Mastercard cannot require merchants to adopt proprietary technology unless other payment providers can also offer it.
Issuers that function as three-party networks like American Express and Discover and issuers with less than $100 billion of assets are excluded from the legislation. Smaller issuers will surely feel the impact, however.
If signed into law, the Fed will have a year to prescribe updates to the Electronic Fund Transfer Act that would take effect at least 180 days from the release of the final version.
A Game Changer
This bill ignores the technological capabilities needed to support dual-network routing on credit cards and the many intermediaries that would all need the ability to support multi-network routing on a single card which is generally not possible today. Questions exist about routing potential transactions initiated on EMV cards, contactless cards, and mobile wallets. New standards may be necessary, and some issuers may need to reissue chip cards when card stocks and chips are in short supply.
The act would fundamentally change the credit market even if these technical challenges are solved. Winners would include the largest U.S. merchants, such as Walmart and Amazon, which would likely see reduced acceptance costs. Another potential long-term winner could be debit networks that extend capabilities to support credit. Issuers operating as three-party payment networks like American Express and Discover may see opportunities to increase their share. Given the unique advantages an exemption to the legislation would have, it would be hard to imagine any current large cobrand issuer being able to maintain competitiveness with such entities.
There would also be many losers – starting with consumers and issuers with less than $100 billion of assets. Limiting consumer access to credit will be problematic, pushing more people to nontraditional sources of credit, and potentially outside the banking system. The idea that lowering merchant costs will directly benefit consumers has been disproven; the Fed found that about 1 million consumers lost banking access due to Reg II. There was no evidence merchants that received an immediate $6 to $8 billion windfall passed it on to consumers by lowering prices. Bill S.4674 is unlikely to be any different. Issuers with large portfolios or midsize issuers would have a disincentive to grow their portfolios; ergo, they could scale back on rewards and benefits.
While Sen. Durbin claims that credit interchange disproportionately impacts mom-and-pop merchants, the bill is unlikely to benefit them. Small merchants generally have bundled pricing structures with their merchant acquirers, letting the acquirers benefit from any increased competition tied to merchant routing.
A Sweeping Impact
Why are community banking and credit union organizations opposed to the bill? While the bill is written to apply only to card issuers with more than $100 billion of assets, it could impact all banks and credit unions.
The Durbin Amendment employed the same gimmick, exempting institutions with less than $10 billion of assets. It also reinforced that small and large FIs compete against each other. Unnatural price restrictions imposed on one group inevitably impact others, as they did when Reg II resulted in reduced interchange for smaller institutions.
The consumer experience could materially change in the form of reduced rewards, scaled-back or eliminated benefits, and changes in customer rights and marketing. It will be interesting to see the reaction from members of Congress when they realize the credit card rewards/airline miles/hotel points they earn are about to be seriously diminished. For issuers, contractual, financial, operational, and technology challenges will need to be addressed.
Frankly, this bill also stifles innovation. Networks' abilities to develop proprietary authentication, fraud management, and customer experience technology will be limited because the bill requires networks to provide open access to competitors. It is hard to see why any network would invest in innovation that must be shared with competitors. Limiting fraud in the payments system is generally regarded as a positive, and it is unclear why Sen. Durbin is proposing legislation that would inevitably increase fraud. The bill may be one of the first pieces of legislation to force banks to do business with competitors since the top issuers will have to partner with networks that also issue cards.
What to Expect
Fortunately, the bill has a long way to go before it becomes law. The original Durbin Amendment was attached to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was sure to pass. It seems unlikely that Sen. Durbin will have a chance to do something similar in the near term.
The ultimate irony is that, during the debate on the Durbin Amendment, Sen. Durbin defended the value of credit interchange, saying:
"About half of the transactions that take place now using plastic are with credit cards, and there is a fee charged — usually 1% or 2% of the actual amount that is charged to the credit card. It is understandable because the credit card company is creating this means of payment. It is also running the risk of default and collection, where someone does not pay off their credit card. So, the fee is understandable because there is risk associated with it."
It is unclear what has changed in his mind. Merchants have various payment acceptance choices, including checks; debit; prepaid; ACH; Buy Now, Pay Later (BNPL) services; PayPal; and crypto. A bill solely based on displacing market share of two providers lacks any logical rationale.
The bill makes the Fed responsible for implementing regulations within a year, which would be challenging because the proposed solution is not technically possible and will require many players' coordinated efforts. It will also require revisions to the Electronic Funds Transfer Act, bringing other Senate committees into the mix.
The Bottom Line
There is significant opposition to this bill from many facets of the issuing community and limited overall support. However, Reg II shows that Sen. Durbin is astute at passing legislation using all means possible such as adding it to another bill as a rider that can get passed through reconciliation. Issuers must be vigilant by working with their associations to oppose this bill.
Sen. Durbin's introduction of the CCCA is likely the first in a series of banking-related legislative and regulatory actions in the coming months. The fall elections bear watching since the results could determine the likelihood and pace of change. SRM will keep you informed of any developments as they unfold.
Myron Schwarcz, Chief Product Officer, and Keith Ash, Senior Vice President, have two decades of experience in the banking industry, advising leading financial institutions on their strategic initiatives. Further inquiries may be made by emailing Myron at mschwarcz@srmcorp.com or Keith at kash@srmcorp.com.