So called “credit card swipe fees” — specifically, interchange fees — burden consumers and businesses, resulting in higher prices charged for goods and services, critics charged at a Senate hearing on Tuesday morning (Nov. 19).
And, they said, the current construct of the credit card market is inherently anti-competitive.
Executives from Visa and Mastercard maintained that the size and scale of their networks help deliver value to those same consumers and businesses, along with technological innovations, particularly for cybersecurity and zero liability on the part of consumers for fraudulent transactions, that actually benefit all stakeholders in the commerce ecosystem.
And they countered that the payments landscape is competitive, with the recent rise of FinTechs and other players, where payments take place outside the card rails.
The Senate Judiciary Committee hearing titled “Breaking the Visa-Mastercard Duopoly: Bringing Competition and Lower Fees to the Credit Card System” comes as proposed legislation, the “Credit Card Competition Act” (CCCA), would require larger issuing banks (with $100 billion or more in assets) to offer a card network to merchants beyond Visa or Mastercard.
Chairman Dick Durbin (D-Ill.), in his opening remarks (the hearing was still ongoing as of this writing), contended that there is a “hidden contributor to the high price” consumers pay “on everything from furniture to eggs.” The interchange component of the card swipe fees, he said, paid to the issuing banks, is set by the payment networks, running between 1% to 3% of the total bill paid by consumers.
“The credit card market is dominated by Visa and Mastercard,” he said, tied to 83% of card transactions in the U.S. And Durbin said in his remarks that merchants have little choice — either they accept the fees or they refuse to accept Visa and Mastercard entirely, “which in this day and age is no choice at all for retailers.”
With a nod toward the $1.1 trillion paid in interchange fees since 2006, Durbin said less a third of those fees had been the result of debit card transactions. The 2010 cap on debit interchange fees, he said, saved consumers $6 billion in the first year since implementation and “billions more since.”
He charged that the Visa and Mastercard “duopoly virtually prints money on behalf of their big bank partners” and said the CCCA would break a “stranglehold” on the credit card market as merchants would choose the payment network over which transactions would be routed.
In testimony during the hearing, Christopher Callahan, co-owner of New York-based Battenkill Books, said that “high swipe fees are a challenge for every merchant, regardless of size or sector. Most Main Street businesses have no choice but to share that burden with their customers in the form of higher prices, surcharges or decreased services.”
Notre Dame Law School Professor of Law Roger P. Alford told senators the CCCA would introduce price competition in the market for interchange fees as a result of the routing alternatives.
Visa’s Bill Sheedy, senior advisor to the CEO, said in his Senate testimony that “interchange is a bank-to-bank fee paid by acquirers to issuers for credit and debit transactions (the reverse is true for certain other transactions like ATM). It’s important to note that Visa has no incentive to set these inter-bank interchange fees at levels that are too high or too low. We focus on growing and optimizing transactions on our network, which we can only do when merchants and consumers successfully and securely complete sales. Without those sales, we have no transactions to process.” He said that the company, through the past five years, has invested $11 billion to boost cybersecurity and blocked $40 billion in fraudulent transactions.
In her own Senate testimony, Mastercard President of the Americas Linda Kirkpatrick said the proposed legislation would in fact harm competition in the card markets, as it would impose “artificial controls on a system that is working well.”
Her testimony posited that the CCCA would conceivably “eradicate” the competitive dynamics of the marketplace “in favor of advantaging American Express.” She noted, too, that the CCCA would “lead to fewer choices for consumers” and little benefit for merchants. She pointed too, to the fact that the 2010 cap on interchange fees for debit transactions did not in fact translate into merchants’ passing savings onto consumers.
And, she added, the growth in players such as PayPal and others have given merchants and consumers more choice than ever, creating their own “ecosystems of value exchange.” Kirkpatrick’s testimony said the proposed legislation would force issuers to re-issue hundreds of millions of new cards, and develop new infrastructure to support new merchant routing, with billions of dollars in attendant replacement costs.
Separately, as noted by PYMNTS in reference to interchange fees, previously and as detailed here, in the study “The Impact of the U.S. Debit Card Interchange Fee Caps on Consumer Welfare: An Event Study Analysis,” economist David Evans wrote that banking customers “lost more on the bank side than they gained on the merchant side,” by as much as $25 billion in discounted value dollars, as a result of the interchange fee caps implemented by the 2010 Durbin Amendment.
The Federal Reserve, in a separate paper, said banks “changed various account terms and fees in ways that increased prices for accountholders” in the wake of the debit card interchange fee regulation.
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