In the 117th Congress, Sens. Dick Durbin (D-IL) and Roger Marshall (R-KS) introduced the Credit Card Competition Act of 2022 (CCCA), legislation that would extend the Durbin Amendment’s debit interchange network routing requirements to also cover credit cards. A House version of the legislation was introduced by Reps. Peter Welch (D-VT) and Lance Gooden (R-TX).
NAFCU President and CEO Dan Berger wrote to the Senate after the CCCA was introduced to express strong opposition to the legislation and reiterated these concerns when the House companion measure was introduced. NAFCU’s advocacy and the grassroots efforts of credit unions across the country helped to prevent these bills from gaining support or advancing to a vote, but NAFCU expects this legislation to be reintroduced in the new Congress.
In October 2022, the Federal Reserve issued a final rule amending Regulation II to require debit card issuers to enable multiple unaffiliated networks for card-not-present transactions. The rule does not require issuers to ensure that two or more unaffiliated networks will actually be available to merchants to process every electronic debit transaction, but rather the issuer must enable routing choice for card-not-present debit card transactions. NAFCU commented on the Regulation II proposal in August 2021, opposing changes to the current regulation and urging the Federal Reserve to withdraw the proposed rule. NAFCU also joined other financial services trade groups in a joint letter opposing the proposal. A lawsuit filed against the Federal Reserve by the North Dakota Retail Association and the North Dakota Petroleum Marketers Association arguing that the Fed should enforce a lower cap on debit card interchange fees was dismissed in March 2022.
Credit unions’ experience with the original Durbin Amendment has proven that even a high asset threshold “exemption” offers no protection to smaller financial institutions. Credit unions of all sizes and their 131 million member-owners would suffer significant negative impacts if this legislation were enacted.
As noted above, the Durbin Amendment contained a provision that was supposed to exempt institutions under $10 billion in assets from its new debit price caps. However, studies have shown that “exempted” institutions actually have seen their per-transaction interchange income decline by more than 10 percent in real terms, which is particularly harmful for community financial institutions in rural and underserved communities. For larger financial institutions, the fixed component of the debit interchange fee cap has not once been adjusted for inflation since it was set in 2011. Importantly, credit unions face statutory limitations that make it difficult to compensate for this decline in revenue through offering additional products or making alternative investments.
Consumers have also directly felt negative impacts from the Durbin Amendment, through a significant reduction in the number of debit card rewards programs and a major decline in the availability of free checking accounts. Even financial institutions meant to be exempt from the Durbin Amendment suffered from the “spillover effects” of regulation as market pressures caused a policy targeted to large institutions to instead affect the broader industry as a whole. Clearly, enacting similar changes to the credit card interchange market risks redoubling these negative consequences for consumers, and market forces would lead to routing requirements for large financial institutions functioning as a backdoor price cap for community credit unions.
Credit union leaders understand the significant threat this legislation poses, including what lost revenue actually means for the ability to serve credit union members.
For example, Thomas Domingue, President and CEO of Labor Credit Union in Washington, DC, said:
This legislation will have a significant detrimental impact on our ability to continue providing services to underserved areas and groups within our membership. A reduction in our interchange income, which this legislation will result in, has a compounding impact. Every $0.10 reduction in interchange income results in $1 being removed from our ability to lend to those in need, or to provide critical services such as checking accounts for free.
Retailers Distorting Reality
When they argued for the original Durbin Amendment, retailer groups frequently claimed those restrictions would lead to cost savings for consumers and small businesses and greater choice and reliability in payment networks. Unfortunately, these promises did not come true. Research from the Federal Reserve Bank of Richmond found that 98.8 percent of merchants did not decrease prices in response to their lower interchange costs and 21.6 percent even implemented price increases. Among businesses, big box retailers clearly saw greater benefits from the Durbin Amendment’s price caps than small businesses, many of which were harmed by government distortion of the market price for interchange fees. The Durbin Amendment’s routing provisions also had a harmful effect on financial institutions and consumers. Fraudulent debit transactions have more than doubled since the Durbin Amendment was enacted and allowed retailers to process transactions over less secure networks rather than the secure networks consumers had chosen, and the cost of remediating consumers continues to fall on financial institutions.
In fact, electronic payments offer benefits to retailers that far outweigh the costs of interchange fees. Small merchants recognize the value of electronic payments and a majority are satisfied with their interchange costs, and merchants even prefer credit cards to debit cards despite the higher interchange fees associated with credit card payments. Increasingly businesses are attempting to refuse to accept cash payments at all, deciding that the costs of handling cash, though they are not itemized, greatly exceed the costs of accepting electronic payments. While contactless payment methods offered obvious health and safety benefits during the height of the COVID-19 pandemic, merchants also realize the more general economic benefits they stand to capture from the increasing growth of electronic payments. Executives from companies like Kroger, Macy’s, Chipotle, and NCR are all on the record recognizing the value of electronic payments in lower costs, higher transaction values, and increased customer convenience.
In total, debit card issuers lost more than $100 billion in revenue from 2012 through August 2021 as a result of the Durbin Amendment. As retailer groups and their allies in Congress work together to try to impose new routing requirements for credit card transactions, even small financial institutions exempt from the proposed changes are at risk of further revenue losses.