Durbin 2.0 and What It Means for Merchants

Large retail trade organizations, including the National Retail Federation (NRF) and the Retail Industry Leaders Association (RILA), have welcomed the proposed Credit Card Competition Act of 2022 that will let merchants decide which network processes their credit card transactions. Their support is based on the proposed legislation ending routing practices that stifle competition in the payments industry and increase costs for merchants and consumers.

Processing credit card transactions is primarily limited today to two companies, Visa and Mastercard, when there are many companies that can get the job done equally well, said Leon Buck, NRF Vice President of Government Relations, Banking and Financial Services in a recent interview. Routing choices in the debit card market have already saved merchants and consumers billions and can do more in the larger credit card market, he added.

In 2021, Mastercard and Visa credit cards transacted about $3.49 trillion in the US alone. With their network structure and market power, Visa and Mastercard impose some of the highest fees in the US. They charged merchants a whopping $77.48 billion in fees (interchange fees plus network fees). In the end, these costs are passed down to consumers.

These fees are a direct result of the immense power Visa and Mastercard have in the credit card space. The Federal Reserve reports that the two card networks account for about 83 percent of all general-purpose credit cards, or 576 million cards. Currently, all credit card purchases via Mastercard and Visa credit cards are only processed on their respective company networks. As such, they dictate the terms and fees the banks will receive from merchants per transaction. Since merchants cannot risk losing access to the millions of consumers served by Mastercard and Visa member banks, most cannot negotiate transaction fees and terms.

The Credit Card Competition Act 2022 that is sponsored by Senator Dick Durbin and Senator Roger Marshall would change that.

The bill would instruct the Federal Reserve tol implement new regulations within a year that would have card-issuing banks allow transactions to be processed over two or more payment networks, with at least one unaffiliated with either Mastercard or Visa. This rule would only apply to banks with $100+ billion in assets and won’t affect small credit unions and local community banks. With added competition, merchants and customers are projected to save $11 billion a year.

It’s also worth noting that the bill will prohibit card networks and banks from taking steps that’ll affect credit card routing, including requirements to use proprietary Mastercard and Visa mechanisms, unless they make it available to every network.

Mastercard and Visa are under a microscope after their move to increase interchange fees in April 2022. They cited increased costs from compensating issuing banks, funding anti-fraud measures and providing consumer rewards as their reason for the increase. Moreover, card networks claim they face stiff competition from cryptocurrencies, peer-to-peer payment apps, and BNPL services.

Sen. Durbin questioned the increase on several fronts:

• The increase in interchange fees plus the recent inflation will make it even harder for merchants to remain in business
• Consumers will inevitably bear the cost of the increase since merchants will have to raise prices
• Only affluent consumers (those eligible for higher tier reward programs) will benefit from the increase
• Merchants cannot negotiate with credit card companies since Mastercard and Visa are a duopoly

In addition to challenging the increase in interchange fees, Durbin proceeded to draw up the bipartisan Credit Card Competition Act of 2022 as a follow-up to the Durbin Amendment of 2010.

The Durbin Amendment allowed the Federal Reserve to cap interchange fees merchants incurred each time they processed a debit card payment. Sen. Durbin hoped that lowering the per transaction debit interchange fees would stimulate economic growth. After all, if merchants didn’t incur high interchange fees, they’d pass on their savings to customers, enticing them to spend more.

However, the Durbin Amendment’s effects were concentrated on medium-high ticket merchants like Amazon, Wal-Mart, and Target since they managed to slice their interchange fees by almost 50 percent. Small merchants weren’t so lucky. In fact, some paid higher interchange fees. Instead of a 1 percent interchange fee, they parted with a 22-cent flat rate which translated in some cases to a 1,000 percent increase in interchange fees. To remain afloat, many businesses opted to retain pre-Durbin Amendment prices or increase them.

As a result of the Durbin Amendment, major issuing banks cut back on debit card rewards programs. They also raised the bar on monthly account balances for free accounts and started charging consumers almost double the amount for checking accounts.

Despite these challenges, the Durbin Amendment of 2010 helped merchants to save over $9 billion a year, according to a study cited by NRF, with an estimated 70 percent of these savings being passed down to consumers.

The credit card networks are against the Credit Card Competition Act of 2022, mainly – they claim – because it threatens revenue needed to provide security and manage card payments. They say, instead of seeing the credit card networks as the enemy, merchants should consider credit card processing fees as a necessary cost of doing business.

While this may be true, it’s also true that like the original Durbin amendment, merchants will save more and may pass their savings down to consumers.