If you’re a small business owner, you’re well aware of the costs involved to accept card payments from your customers. The majority of processing fees AKA interchange rates, goes to the bank who issued the card.
Interchange rates are based on the type of card used, there are hundreds of different rates.
Fees also include dues & assessments to the card brands (VISA, MC, Discover, AMEX) along with regulatory fees and the markup that your processor adds to move the funds and keep track of the transactions.
With interchange rates steadily increasing, a few members of congress have proposed legislation with the intention of lowering rates.
The Proposal
On July 28, 2022 the Credit Card Competition Act of 2022 (H.R. 8874) was introduced by Senator Richard Durbin (D-Ill.), Senator Roger Marshall (R-Kan.), Representative Peter Welch (D-Vt.—now a senator) and Representative Lance Gooden (R-Texas). It did not pass at the time, but was reintroduced in June of 2023.
The legislation would require the largest U.S. banks that issue Visa or MasterCard credit cards to allow transactions to be processed over at least two unaffiliated card payment networks—the same process that has been used for debit card transactions for more than a decade.
The idea is that more competition will provide lower processing rates for businesses, and save consumers money. Small business owners often operate on small profit margins, and operating costs are continuing to rise. The proposal also addresses a potential security concern.
The Merchants Payments Coalition (MPC) told a house committee holding a hearing on economic threats from China that passage of the Credit Card Competition Act is needed to keep China from “infiltrating” the U.S. payments processing market.
If passed, the Credit Card Competition Act would forbid card networks that present a national security threat to the United States (including China UnionPay) from entering the U.S. market. MCP noted that there are no federal laws that prevents any financial institution from doing business with China.
Who Would Oppose This?
This all sounds good, right? Better security and lower rates – is there a downside?
In a recent article by Erica Sandberg, small business owner David Collado of Happy Howie’s All Natural Dog Treats was interviewed. David was quoted as saying “There are times when you don’t need competition. As a cardholder, I care most about the best cyber security and fraud protection. Visa and MasterCard do that. I want a high degree of accuracy and don’t want to hand that off to any company.”
David raises a good point – opening the network to competition would require new technology and systems. As with anything new, there will be glitches and flaws along the way. It should be noted that this has been tried before with the debit card networks and the Durbin Amendment passed in October of 2011.
Good Intentions ≠ Good Results
The Durbin Amendment, is part of the Dodd-Frank Act, and set federal price caps on debit interchange fees. It also mandated routing requirements for payment networks. Large retailers and merchant groups claimed the law as a win for consumers, and claimed it would lower prices and provide more competition in the payment processing industry.
In the 12 years since its enactment, it is very clear that the Durbin Amendment has failed to accomplish its mission. According to the Federal Reserve Bank of Richmond only 1.2 percent of merchants lowered their prices, and 22 percent increased them! Rather than pass along the savings, large retailers pocketed what could have been used to lower prices.
The Durbin Amendment also resulted in the elimination of popular programs such as low-fee accounts and debit card reward programs. By placing caps on debit interchange fees, revenues for credit unions and community banks were severely reduced.
Smaller financial institutions were not able to provide consumers with perks such as free checking accounts or debit reward programs. These services were very popular with consumers, and when they were eliminated, people lost the value that went with these important financial products.
Do We Need Legislation?
In a recent article from Forbes John Tamny the Vice President of FreedomWorks, writes that because of the enormous amount of electronic transactions, competition is already in place and eager to serve the market.
John writes ” It’s not needed. Think about it. If there’s that much commerce taking place with Visa and MasterCard as the financial middle man, we needn’t worry about a lack of competition.”
Technology is rapidly evolving and the use of cryptocurrency is become more common as well. The impact for consumers could mean less access to financial services, higher costs, fewer or no credit card rewards and increased security concerns.
The bill was read twice on July 28th, 2022 and referred to the Committee on Banking, Housing, and Urban Affairs. You can follow the bill here.
Feel free to contact us for a detailed analysis of your current card processing fees.
