Credit Card Regulation and the Law of Unintended Consequences

There's chatter about more regulation coming from Washington on credit card fees. The Credit Card Competition Act of 2023 is a bill that would require large banks to provide merchants with a choice of two different networks for processing transactions. The bill would apply to banks with more than $100 billion in assets (about 30 banks in the US) and would require the Federal Reserve to issue regulations within one year to ensure that banks cannot restrict the number of networks on which a transaction can be processed to less than two unaffiliated networks.?

Comments from the sponsor of the bill indicate that “it's time to inject real competition into the credit card network market, which is dominated by the Visa-Mastercard duopoly.”

Last time Congress attempted to regulate fees the target was debit card fees. I’m not sure Congress fully understood what the outcome was going to be but here’s some observations.

• Low cost competition was crushed and so was innovation. In 2010, at the time of the first effort to regulate transaction processing cost, there was an emerging set of innovative services looking to drive the cost of a debit transaction down to $0.25 per transaction. Much of that innovation was around leveraging the ACH network and models like de-coupled debit to deliver a different value proposition (ex, Target, CapOne, Tempo Card etc). Once the legislation passed, debit was capped at $0.21 + 5 basis points and most of these emerging business models that were attempting to innovate around the ACH network were no longer viable.?
• Small banks took advantage of the carve out. Innovation continued to occur using the small bank exemption which at the time was set at $10B. Banks like Metabank and Bancorp came to be the bank’s of choice among innovators of pre-paid debit programs because they could issue debit programs earning non-regulated (higher) interchange. Look at the banks behind some of the most innovative digital solutions today and you’ll find a stable of banks all below that $10B in assets that are the issuers behind services like CashApp (Sutton Bank), AppleCash (GreenDot), Venmo (Bancorp) etc.?
• Merchants did not necessarily see the savings. The regulation didn’t address what merchants are charged, it targeted what issuers could earn. Merchants are typically priced under two different models - one, "cost plus" where they get charged a fee by their merchant service provider and all other costs are passed thru at cost, and two, "merchant discount rate (MDR)" where merchants are charged a fixed fee in the form of a percent of transaction plus a fixed dollar amount, like 2.3% plus $0.15 for all transactions. Cost plus merchants saw a benefit from the reduced fee issuers were able to earn, but cost plus pricing is typically used with large merchants. MDR merchants saw very little benefit; for these merchants the merchant service provider took the reduced cost to their bottom line.
• Consumers saw far fewer debit rewards programs. While debit rewards programs aren’t completely extinct, they are much less common than before the first round of regulation. Limiting the amount of revenue a large issuer could earn made the ability for those large issuers to offer rewards tied to debit transactions extremely rare.
• Visa and MasterCard’s moat grew larger. In May 2010, the Durbin amendment passed a Senate vote leading to it becoming law later that year. Investors saw Visa’s stock price trade to over 30% off it’s 2010 high before it started to become clear that Visa and MasterCard were unintentionally given a gift. Since 2010, Visa and MasterCard have outperformed the S&P500 by 4-5X .

Since mid-2010, MA (orange + 1,797%), V (blue + 1,243%) and the S&P500 (green + 327%)

In summary, the unintended consequences of the last round of Durbin legislation was less competition, less innovation, disparate savings to merchants, fewer benefits for consumers and more concentrated power in Visa and MasterCard.

So what can we anticipate in this next round of legislation??

When I use a Visa and MasterCard it has their logo on the card and I can shop with a level of confidence knowing each transaction comes with a set of benefits beyond rewards. I have purchase protection, sometimes trip insurance, sometimes rental insurance.?

• What happens when the merchant chooses to route that transaction to a network other than Visa or MasterCard??
• Can I assume those same benefits come into play?

I’ve had a few instances where I had to dispute a transaction through my bank subject to rules set by Visa and MasterCard.

• How many other networks will now be involved in resolving my disputes?
• Will I be able to see those dispute rules?

The merchant might have the ability to choose a network for cost purposes.

• What right do I have as a consumer to also have a say where I want my transaction to be routed??
• Will merchants need to disclose to me that they’re choosing to route a transaction that doesn’t have the same dispute rights or purchase protections that I’ve grown accustomed to with Visa or MasterCard?
• Will my ability to get fraud alerts on suspicious transactions like I do today or will that change?

If this legislation advances I hope there’s a good debate around what the last law actually accomplished and what unintended consequences might come into play with new changes. Payment processing looks easy but what happens below the waterline is anything but easy, or obvious.