Instead of extending the Durbin Amendment to credit cards, Congress should repeal it

Price regulations harm more people than they benefit.

Credit has been used to buy products in America for almost as long as the country has been, but the consumer goods sector has changed dramatically. As a result, it's easy to overlook how ubiquitous plastic cards have become.

Unfortunately, at last week's Senate Judiciary Committee hearing, forgetfulness triumphed.

Much of the debate made it appear like Visa and MasterCard suddenly stormed into America and took over the card network industry, despite the fact that it was supposed to be a fact-finding trip regarding the costs that businesses pay when users swipe their cards to make a transaction. Obviously, this is not the case, and the evolution of the sector should guide public policy.

Nonetheless, Senator Dick Durbin (D-IL) made it plain that he intends to extend pricing controls and routing rules to the credit card business. (For those who don't recall, Durbin was the architect of Section 1075 of the Dodd-Frank Act of 2010, popularly known as the Durbin Amendment, which imposed interchange ceilings and routing restrictions on debit card purchases.) At the time, Durbin also stated that 1 to 2 percent interchange fees for credit transactions were "understandable since there is risk involved."

The Durbin Amendment hasn't served consumers well, and Congress should have abolished it in 2017, but Durbin and his acolytes aren't ready to give up.

The Durbin gang wants the public to accept a whole different tale, regardless of how much proof there is that the credit card network sector is very competitive. Visa and MasterCard, for example, control the sector and utilize their clout to impose exorbitant fees. Of course, only Congress has the power to solve the situation. (This sector has a long history of lawsuits, with both sides winning and losing at various times, but retailers were unwilling to risk going to court as customers began to rely more heavily on debit cards.) As a result, the Durbin Amendment was enacted, along with a fresh campaign to enlarge it.)

All parties in this argument are looking out for their own interests, but there are reasons to doubt the Durbin gang's story.

First, when the credit card industry is considered independently from the combined credit and debit card market, Visa has around a 50% market share (by volume), while MasterCard and American Express AXP each have about 20%. Since at least 2016, this structure has been consistent, with Discover (the fourth largest card network) rising slowly but consistently.

When measured by the percentage of Americans who own a certain card, Visa has less than a 50% market share, MasterCard has less than 40%, Discover has 18%, and American Express has 15%. Although Visa is the larger corporation, the networks are undoubtedly in competition for volume. Discover increased its market share by 2 percentage points in 2021, while fintech startups continued to pose new competitive risks to the industry's established payment methods.

To put it another way, Visa and MasterCard do not, in any objective sense, control the credit card business.

Regardless, if Visa and MasterCard are indeed ripping off retailers, there's a clear solution: start a card network that undercuts their prices and steals all of their business.

In the United States, there are over 150,000 convenience shops, more than 20,000 independent supermarkets, and more than 1 million retail outlets. If the Durbin gang is correct, and it is so simple to manage a card network while charging drastically cheaper costs, these business owners are missing out on billions. So why not join a payments organization, much like banks did in the 1970s to build the Visa network, and compete directly with the current networks?

They'd almost certainly generate enough money to quit paying the National Association of Convenience Stores (NACS) to lobby for lower merchant fees.

Of course, they should consult with the Discover team beforehand.

When Sears introduced the Discover credit card in 1986 to compete with Visa and MasterCard, it featured no annual fee, cash back benefits, and no merchant fees. Discover was the only credit card accepted at Sam's Wholesale Club because of its no-fee feature.

Discover eventually acquired universal acceptance, but only after several blunders, millions of dollars in losses, and a shift in approach. Discover currently charges interchange fees ranging from 1.5 percent to 3 percent, which are similar to the rates charged by Visa and MasterCard.

The merchants should also contact American Express, which charges interchange fees ranging from 1.5 percent to 3 percent. They should, of course, speak with Venmo, the upstart payments startup that costs retailers 1.9 percent.

At the absolute least, they'll learn a lot about how to create and maintain a payments network in the United States.

It may appear that I am being unjust to retailers, or that I am ignorant about Visa and MasterCard. But I'm neither of these things. There's little doubt that both parties are looking out for their own interests, and there's nothing wrong with the NACS representing its clients.

Still, it's important to remember that the NACS is asking Congress to act as a market judge and jury rather than putting its ideas to the test. On the other hand, the card networks rely on the market to be their judge and jury.

They continually test their pricing in the market, balancing the interests of all parties to determine how much they can charge, even if it means losing business if they charge too much. That's about as objective as we can get as humans, and it's one of the main reasons why a free market is preferable to a tightly regulated economy with government-imposed price limits and mandates. It is true that not everyone will be pleased with the amount they pay the card networks, but that is beside the point.

For two reasons, I find it difficult to accept the NACS's viewpoint at face value. First, its general counsel, Doug Kantor, requested that Congress consider eliminating the networks' authority to compel shops to accept all of their cards. This request reveals the NACS's obvious self-interest: they are only interested in gaining influence, not in saving customers money.

If Congress takes away the networks' authority to require stores to accept all cards in their network, customers would suffer and retailers may be threatened. One of the key reasons that retail businesses accept Visa and MasterCard as payment is that any customer having a Visa or MasterCard credit card can use it to make a purchase. The NACS is requesting that Congress consider taking that benefit away from the networks and, as a result, consumers.

It is essentially a threat to make the Visa and MasterCard networks smaller and more localized, rather than larger and more nationalized. It would be fascinating to discover how many NACS members genuinely want that outcome, particularly those who sell petroleum near interstate roads.

My other problem with the NACS’s position is that Kantor’s written testimony twists the facts regarding a Kansas City Fed research paper. According to Kantor (see page 5):

Economists with the Kansas City Federal Reserve Bank have studied these fees and found that, in light of the central fee‐​setting structure and the competitiveness of U.S. retail, swipe fees will increase to the point that retailers may go out of business.

It is charitable to call this statement a mischaracterization. The research paper that Kantor cites unequivocally does not say that swipe fees will increase “to the point that retailers may go out of business.” The paper simply presents a theoretical model that tries to “explain why merchants accept payment cards even when the fees they face exceed the transactional benefits they receive from a card transaction.”

And here’s what the paper comes up with:

Even monopoly merchants accept cards when their transactional benefits are lower than the fees they pay if they face an elastic consumer demand. They do so not because they have a strategic reason but because card acceptance shifts their cardholder customers’ demand upward and thus brings in incremental sales.

The paper literally explains why it might be in merchants’ best interest to accept these cards for payment even when the fees appear to be too high. It also predicts the following welfare outcomes:

In comparison with the equilibrium without cards, if the network charges the highest merchant fee then cardholders are better off (or at least indifferent), non‐​cardholders are worse off, and merchants are either better off or indifferent. The total of the consumers’ and merchants’ surplus depends on price elasticity of the market aggregate consumer demand. In markets where the aggregate consumer demand is inelastic, the total of the consumers’ and merchants’ surplus with and without cards are the same.

In the case of elastic aggregate consumer demand, the model predicts that:

In the long run, the merchant fee will converge to the highest possible level and the product prices will also converge accordingly. Under such merchant fee and product prices, the merchant’s profit with cards becomes the same as the equilibrium profit without cards.

It's odd that Kantor even mentions this study in his testimony—the model gives a theoretical rationale for the precise predicament that the NACS is blaming on anticompetitive activity. According to the model, the existing state is economically efficient and, at worst, welfare neutral.

Hopefully, enough members of Congress will recognize that price restrictions harm more people than they benefit. Members will realize that the Durbin Amendment is bad public policy and will repeal it rather than extending it to the credit card sector if they do so.
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