The Unintended Consequences Of Durbin’s Proposed Routing Legislation

It’s a movie that everyone in the payments industry has seen at least once: Merchants challenging the card networks over interchange.

The latest attempt, spearheaded by US Senators Richard Durbin (D-Ill.) and Roger Marshall (R-Kan.), is intended to pass a law that challenges the interchange fees set by Visa and Mastercard. A challenge that does not impose price caps but by giving merchants the ability to route the Visa and Mastercard credit cards presented by consumers at checkout over competing (aka cheaper) networks.

The Act mandates that, with each and every credit card transaction, at least two unaffiliated networks must be available. Visa or Mastercard can be included — but not together.

On Sept. 30, in a recent bit of procedural legislative wrangling, Durbin and Marshall proposed adding the legislation as a rider to the National Defense Authorization Act. That would avoid having members of Congress vote specifically on the Credit Card Competition Act.

Sen. Durbin’s stated goal  is to increase competition by allowing  smaller networks to process credit card transactions,  including debit card networks too, who’d like to service credit transactions.

Competition,  through routing mandates, proponents say would   drive down the transaction costs for merchants since merchants could opt to send Visa and Mastercard transactions over lower cost rails. In a letter to Congress, the Merchant Payments Coalition (MPC) said  the credit card market is “not functioning,” since it is  dominated by Visa and Mastercard, with a combined 83% market share.

According to the MPC and its members, this purported lack of competition drives up prices for merchants and they say, ultimately consumers and “strangles” innovation. The four-party model that supports the general-purpose credit card market globally is monetized through credit card interchange rates set by the networks and paid by the merchants who accept credit cards issued by banks. MPC says that those fees mean that merchants are forced to pass those higher costs onto consumers.