Should Lawmakers Cap Credit Card Processing Fees?

The Durbin amendment is under fire as proponents for both sides began arguing their side at a Senate Judicial Hearing that began on May 4th. Some lawmakers, merchants, and retail advocate groups believe that banks and the major card brands are nothing more than a duopoly. They argue that the payment networks, run by the major card brands, are not competitive marketplaces. and, subsequently, they argue that it's time to regulate the interchange fees.

Visa and MasterCard, along with banking associations and credit unions, take the stance that this is just government interference in the free market. 

They further argue that expanding the Durbin Amendment to credit card transactions would only serve to hurt consumers, undermine security, and reduce options for consumers.

As most merchants are aware, the major card brands, Visa, MasterCard et al., went ahead with their planned Interchange rate increase in April 2022. This action stirred quite a bit of controversy.

Merchants begged the card brands to hold off on the increase due to the ongoing repercussions of the Covid pandemic. Retailer advocate groups even created an ad campaign to convince them not to increase credit card processing rates. 

Senator Dick Durbin (D-Ill) with three other lawmakers drafted a letter to the CEOs of MasterCard and Visa asking them to withdraw their plans to raise credit and debit card fees. 

Ultimately, Visa and MasterCard went ahead with the new rate plans, noting that they had already postponed them twice, once in April 2020, and again in April 2021. Consulting firm CMSPI reported this increase as the largest they’ve charted in a decade. 

In anticipation of the recent increase, the Senate Judicial Committee called a Senate Hearing to discuss “Excessive Swipe Fees and Barriers to Competition in the Credit and Debit Card Systems”. 

Now, lawmakers want to extend the debit card provisions of the Durbin amendment to include credit card processing fees as well. It has resulted in a hot debate between consumer advocates, retail associations, and card brands and banks.

A quick Durbin Amendment refresh

The Durbin Amendment passed as part of the Dodd–Frank Wall Street Reform and Consumer Protection Act. 

Essentially, it put a cap on the fees banks charge retailers for processing debit card payments. The amendment set a debit card processing fee cap of 0.05% plus $0.21 per transaction. It also mandated that there be competition, so banks have a choice in debit networks to send transactions over. 

Currently, the Durbin Amendment only applies Debit card transaction fees. 

Merchants and consumer advocates are concerned about rising processing fees.

Merchants have long loathed the fees imposed on them to accept card payments. And for good reason. Payment processing fees are one of the top 3 biggest expenses merchants have, along with space rent and labor. Merchants paid $32.6 billion in debit and prepaid card fees in 2021, a 21.7% increase over 2020. On top of that, $105.23 billion of merchants' hard earned income went towards the cost of accepting credit cards.

But is expanding the Durbin Amendment provisions to credit cards the right answer? Some say absolutely. Others believe it will have undesirable repercussions for consumers. There’re two sides to every story. Here, we attempt to simply state the argument for both sides.

Proponents for expansion of the Durbin Amendment

Some believe the Durbin Amendment restrictions should be expanded to include credit card processing fees. Sen. Dick Durbin, for whom the amendment is named, argued that credit card fee practices are in dire need of reform. The major card brands (Visa/MasterCard) set the interchange rates charged for processing credit card transactions. In addition to advancing the network and security, a great portion of the funds go to card issuing banks to incentivize them to offer credit cards. Because of this, Durbin and others believe this creates a “duopoly” that doesn’t allow for competition. 

Advocates for regulation argue that increased processing fees force merchants to raise prices, affecting all consumers, even cash paying customers. Another important point is that high swipe fees only serve to subsidize credit card reward programs, which only apply to more affluent card-holding consumers. And for the most part, merchants and retail associations that want regulation believe that interchange fees have risen disproportionately to the cost of network integrity and providing security.

At the hearing, he argued there needs to be greater transparency of the fees merchants pay, for both merchants and consumers. Because, for the most part, consumers have no idea how much merchants pay to accept the rewards cards they so love using.

He also argued that fees should not apply to the sales tax portion of a transaction, as that is essentially a “tax on a tax”. Durbin also proposed that Visa and MasterCard should not be allowed to require “exclusivity deals” that keep banks from using other networks. 

Proponents also include the National Retail Association, the National Restaurant Association, as well as the Merchants Payments Coalition. 

Opponents of Durbin Amendment expansion’s take:

The Durbin Amendment was an epic failure. It did not result in merchants passing savings on to consumers. It took billions of dollars away from banks and credit unions. And all it accomplished was to line the pockets of big box mega-retailers and eCommerce giants who already have means to negotiate lower interchange rates.

Many merchants didn't process enough debit card transactions to even see a “savings” large enough to justify price reductions. And merchants that process several small transactions (convenience stores and coffee shops, for example) actually saw an increase in costs. This is because while the percentage rate went down, the per transaction fee increased, and they process a lot of small transactions. 

Another argument is that Durbin actually led to higher costs for consumers and less access to services and lending. And banks that lost revenue due to caps simply found other ways to recoup the costs from lost fees, namely through adding banking fees. They also quit offering other low-cost or free services such as free checking to their customers. Opponents argue that loss of revenue left many community banks unable to take on risk. That meant offering fewer loans to small businesses who rely on access to capital to survive. 

Opponents also argue that giving the banks a choice on what networks they route transactions to reduces security. They maintain that smaller, cheaper networks are not as technologically advanced as larger networks, and therefore, lack safeguards present in major networks.

However, PCI Security Standards Council mandates that “any organization that accepts, transmits, or stores” payment card data must adhere to a specific set of Data Security Standards. That means all organizations, regardless of size, are required to adhere to the exact same security standards. Merchants of all sizes, banks and credit unions, and networks of all sizes base their security on the same set of standards.

Opponents also argue that these fees are necessary to ensure efficient electronic payments, to fight fraud, and protect merchants. The ABA urged lawmakers to instead support initiatives, such as “private sector real-time payments”, already in the works.

Visa’s representative points out that Visa does make an effort to make processing more competitive for certain hard hit merchant segments. In addition to rate increases, April’s Visa rate update also included interchange rate reductions for segments such as restaurants, grocery stores, and education. MasterCard also introduced new fee programs for certain segments.

Moving forward…

This fight between the banks and card brands and retailers will undoubtedly continue for quite some time. Unfortunately, consumers don’t really have a say, even though they are the cardholders.

As we’ve pointed out, merchants are always looking for ways to reduce their fees. Increased fees could lead to more merchants turning to credit card surcharge programs to reduce their costs. Credit card surcharge programs allow merchants to pass a portion of their fees on to consumers who use credit cards. 

Programs like this allow merchants to keep their costs down. But they also allow banks to continue to collect their fees and incentive banks and rewards programs. When consumers pay the fees associated with using their credit cards, they are essentially paying for their own rewards programs. 

However, these types of programs aren't currently widely used by merchants. And there are some states where credit card surcharge programs are banned. 

As things move forward, we will continue to monitor the outcome of the hearing. We would love to hear all opinions, for and against the expansion of the Durbin Amendment. What do you think? Please feel free to comment below.