What possible credit legislation could mean for Visa, Mastercard and you

Credit card companies appear to be under a political microscope once again as the Wall Street Journal reported Wednesday that Senators are working on a new bill that would target Visa Inc. and Mastercard Inc.

The story noted that Senator Dick Durbin, a Democrat from Illinois, and Senator Roger Marshall, a Republican from Kansas, are planning an invoice that will seek to offer merchants alternative routing options when consumers pay with many Visa Vs.
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and Mastercard MA,
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credit cards.

As things stand, when consumers pay with a Visa credit card, merchants typically have to process it through the Visa network, but the reported legislation would allow processing on unaffiliated networks. It would be similar to what is already required for most US debit cards, due to the Durbin Amendment passed in the shadow of the financial crisis.

Merchants have a controversial relationship with the card industry, angering the increases in fees they are required to pay to members of the financial system when consumers shop with cards. Visa and Mastercard set interchange fees, which merchants pay to card issuing banks. Merchants are also charged network fees which go to Visa and Mastercard.

Retailers argue that card fees are excessive, and that while consumers don’t pay the fees themselves, they may feel the sting if merchants are forced to raise the prices of goods or services to offset processing costs.

Customers without credit cards or banking relationships “essentially subsidize credit card usage by paying inflated, inflated prices for billions of dollars in anti-competitive interchange fees,” said Doug Kantor, president of the National Association of Convenience Stores, in a statement. written testimony before a May Senate Judicial Committee hearing on scroll fees.

Financial sector players, however, consider the fees necessary to account for the risk they take in facilitating the transactions and infrastructure they provide that moves money.

“Interchange is the foundation of the Mastercard network and provides the appropriate incentives for merchants to accept our products and for banks to issue credit to consumers,” said Linda Kirkpatrick, president of Mastercard for North America, in her own written testimony. . “Additionally, Mastercard ensures that banks will act as card issuers (with credit risk) and provide merchants with guaranteed payment on Mastercard transactions.”

According to analysts, whether potential credit-related legislation would actually pass is an open question.

“We are skeptical that a bill that targets Visa and Mastercard directly can become law without a long and bitter battle,” wrote Ian Katz, chief executive of Capital Alpha Partners, a political research organization. “It’s hard to think that Congress can pass this year. “

Katz added that the Wall Street Journal mentioned a potential bill that would likely fall outside the purview of the Durbin Senate Judiciary Committee.

“It is unclear whether this would be such a high priority for Senate Banking President Sherrod Brown, D-Ohio,” he wrote. “It is probably even less so for Senator Tim Scott, RSC, who would almost certainly be the next chairman of the committee if the Republicans win the Senate.”

Barclays analyst Ramsey El-Assal noted that senators appear to be pushing for measures on card routing rather than trade limits, a strategy that “could see a broader bipartisan appeal.”

“At the same time, we see that the path to eventual transition and implementation remains long and uncertain,” he continued. “We expect, potentially, an approach to attach legislation to a larger vehicle (as in the case of the 2010 Durbin Amendment to the Dodd Frank Act).”

Read: Loyalty points as a currency? How Mastercard views the next decade of payment technology

Analysts were also unsure whether the potential legislation would have the expected consequences if adopted.

“For traders, well, the big ones could take advantage of it, as they have very specific and transparent prices regarding trade, while SMEs [small- and medium-sized businesses]that the article mentions as those who bear the brunt of higher fees would likely find separate fees levied on them less transparently, “wrote RBC Capital Markets analyst Daniel Perlin.

In terms of how any law could impact consumers, Perlin signaled that issuers could apply new annual credit card fees. Banks and other financial companies that issue credit cards say interchange fees help fund rewards. This is one reason why debit cards, subject to interchange limits, rarely offer any benefits, unless they are issued by smaller banks.

A higher prevalence of pay cards “could prove to be a credit deterrent for underserved consumers,” Perlin wrote. And if issuers have decided to withdraw premiums due to lower interchange, he sees the possibility that suppliers buy now pay later could benefit from a weakening of the traditional credit value proposition.

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