Senator Dick Durbin is holding a hearing today, “Breaking the Visa-Mastercard Duopoly: Bringing Competition and Lower Fees to the Credit Card System.” It’s a last gasp as he loses influence. With Republicans taking control of the Senate, Durbin gives up his chairmanship of the Senate Judiciary Committee. So his ability to raise the profile of this issue in the future becomes more difficult.

• The proposed law requires banks with over $100 billion in assets (the only ones large enough to support the big travel credit cards) to work with more than one payment network on each of their cards, and to let merchants choose which network to run transactions through. It forbids a card from being just a Visa, just a Mastercard, or a Visa and Mastercard.

• That’s a big subsidy to American Express. And the goal is to prevent Visa and Mastercard from maintaining their swipe fee prices, since they’d have to compete on every transaction for a merchant’s business.

• Currently, payment networks do deals with banks that make a Sapphire Reserve card, for instance, a Visa. They cut long-term deals with Chase that lowers Chase’s processing costs and allows Chase to offer rich rewards to the customer – rebating the full value of swipe fees to the cardmember in many cases.

While Durbin will lose influence, Republicans are no longer nearly as pro-business and can be brought along on this issue. Vice President-elect J.D. Vance appeared to publicly support the legislation but also seemed to back off early in the summer. Anti-trust and market regulation are new bêtes noires of the right, in a significant transformation since Donald Trump first became their standard bearer. Anti-market conservative Josh Hawley has signed on.

Thus far, though, this issue has been largely about raising campaign cash for both sides – getting big retailers and banks to open their pocketbooks to fund campaigns. That’s why the issue won’t go away. It’s likely to remain on a slow burn for awhile.

Here’s what you need to know:

1. The way to ‘bring competition to payment networks’ is staring at us in the face. “Durbin-Marshall” is designed to elevate another payment network to compete with Visa and Mastercard. Capital One’s planned acquisition of Discover does that by bolstering a largely declining payment processing network. And it does that without being a huge transfer from consumers to merchants or risking the payments processing system or availability of consumer lending.

   It’s bizarre to push back on this deal on anti-trust grounds at the same time pushing for stronger competition across payment networks, since this bolsters precisely that competition. Durbin-Marshall seeks to require cards to be used either on the American Express or Discover networks as a challenge to Visa and Mastercard. This deal massively bolsters Discover, creating more competition in payments processing.

   

   It’s not at all clear, though, that there’s any lack of competition in payments. Not only are there American Express and Discover in addition to Visa and Mastercard; as well as cash, checks and debit; but ‘buy now pay later’ is considered an ‘existential threat’ to credit cards. And that doesn’t even begin to peel back the onion of new payment technologies. (Today, blockchain is too expensive to scale as a replacement but compute cost declines – proof of stake versus proof of work makes a big difference here, too.)

2. We know the negative consequences of this law already. Dick Durbin sponsored caps on debit card interchange coming out of the Great Recession. Debit cards cross-subsidized checking accounts. Banks lose money offering checking, but still wanted the business because debit cards linked to checking accounts were profitable. By eliminating that revenue source, banks introduced fees or account minimums, pushing consumers out of banking and into alternatives like check cashing stores instead. Checking options are only just recovering. Debit card rewards became nearly non-existent, costing consumers.

   Credit card interchange caps in Australia have meant not just reduced card rewards, but also devaluation of frequent flyer programs in order to sustain earning of 1 ‘point’ per dollar. And we’ve seen annual fees on cards rise, even as rewards-earning on many cards has been capped. Consumer costs rose precisely as interchange was capped.

   Incidentally in Australia where merchants were permitted to add fees for card acceptance, in 2015 the government found that far from passing savings to consumers, consumers were being overcharged – fees well in excess of the actual cost of card processing.

   Card adoption in Europe, where interchange is capped, is far more limited in the U.S. which also has meant limitation on economic activity and GDP growth – it’s helped to keep Europe poor.

3. But there’s even more major unintended consequences to worry about. Even if you think there’s a problem – which is far from clear – you wouldn’t want to ‘push the button’ on this policy because of how embedded payment processing is in the economy. It just works. You show up in another country and are given a $30,000 vehicle to rent, with agencies simply trusting you’ll either bring the car back or they’ll otherwise get paid even though you’ll be departing the jurisdiction days or weeks later. You can seamlessly make purchases anywhere in the world, have currency converted, and receive consumer protections for your purchase.

   The bundling of accounting for purchases, providing financing where needed (and, in all cases, liquidity for both buyer and merchant), and protections is a valuable service that’s funded by interchange. Limiting the profitability of offering that service limits its available, while the extension of credit availability supports worldwide transactions and growth. How much would this contract? And why would we want it to contract at all? And for whom? There are both society-wide implications for economic growth, and specific harms to those least-eligible for credit (who still need credit, but who get pushed into higher-cost forms of credit – payday loans instead of credit cards).

4. An end to rich frequent flyer and cash rewards. Currently, even factoring cards that don’t earn rewards, 60% of interchange on average goes back to the customer today. If you eliminated interchange, you’d have to believe that retailers would pass through 60% of the savings just for consumers to break even. But that’s not plausible (empirically, similar efforts have shown zero consumer savings.)

   When it’s profitable to process transactions, card issuers incentivize consumers with rewards to attract those transactions. Less profitable transactions, due to lower swipe fees, means spending less to attract those purchases.

   You’d harm airlines, whose frequent flyer programs are profitable because of credit cards. And their flying is in large measure driven by attracting this revenue. United re-built its domestic network, in CEO Scott Kirby’s telling, because scale in domestic markets meant they’d win consumer co-brand card adoption. Southwest needed to fly to Hawaii to offer that as a reward to its credit card customers, and now their service is a lifeline between the islands and crucial to Maui’s economic recovery after devastating wildfires. Should we scale this back so that big retailers can save a few basis points?

   The current proposed law probably doesn’t fully eliminate rewards, just as it hasn’t in Europe and Australia (though advocates of the law conceded they want to go further than the current legislation under consideration). But remember that even profitable Delta earns most of its net income from card rewards. Without these rewards we’d have fewer major airlines and less competition.

   During the pandemic, even with $58 billion in direct government subsidies, airlines needed to borrow against the future revenue from card deals in order to stay afloat. American Airlines in particular borrowed $10 billion against AAdvantage to stay liquid during Covid.

   
   Grounded American Airlines Jets At The Start Of Covid

5. The Department of Transportation’s investigation of frequent flyer programs is linked to this legislation. DOT is investigating consumer harm from frequent flyer programs. This was spurred by Senator Durbin. In part, it’s revenge for airlines pushing back on his efforts to cap interchange. But mostly it’s a strategic part of the debate. If he can undermine the credibility of programs, and say that the government finds they harm consumers, then it’s less impactful to say that taking away these benefits hurts consumers.

   Obviously it’s much more complicated than this. There are actions that airlines take with their programs that can be legitimately criticized, while still recognizing that they provide value to members and undermining that value leaves consumers worse off.

   

6. Credit card transactions subsidize cash less well off consumers. Consumers spending cash don’t pay more for goods and services, even though cash is more expensive to accept than credit cards.

   In many businesses, retail clerks make incorrect change, losing money for their employers. They pocket some of the cash, losing money for their employers. Heavy cash businesses often pay higher insurance rates because of risk of outside theft and loss. Retailers that prefer or discount cash payments often do so because it makes tax fraud easier – hardly an outcome we want to be encouraging with new legislation.

   Since cash is actually more expensive for merchants to accept than credit cards, cash customers are driving higher costs for retailers without paying a surcharge. Oddly, it’s in vogue to suggest that poorer consumers (who use cards also!) subsidize better off consumers through rewards, but the subsidy actually goes in the opposite direction!

   Cash acceptance is often estimated to cost 4% – 9% or more, depending on the industry, but where interchange limits have been imposed prices have not fallen (Europe, Australia). That means that prices aren’t higher than they otherwise would be (for the poor, or everyone) because of card interchange.

   In contrast, consumers using credit cards spend more with each transaction and are more profitable customers. It’s why merchants voluntarily accept credit cards – it is in their interest to do so! Many even prefer to go ‘cashless’.

Ultimately credit card processing is a service. In fact, it’s a hugely valuable service that combines efficient payment processing – more efficient than cash or checks – with consumer protections and financing that boost economic growth. That’s possible because it’s profitable to offer. If you’re concerned that it’s too profitable then the solution is more competition, so we shouldn’t stand in the way of more competition. But don’t push the button on re-engineering the system in a way that we know has major negative consequences.

I’ve struggled and struggled to find something beyond provincial, pecuniary benefits to retailers in this proposed legislation and I’ve genuinely been unable to come up with an honest consumer or societal benefit.

Meanwhile card, and interchange, are so woven into the fabric of the economy that it’s difficult to even predict the full extent of damage from redistributing money here not just from payment networks but also from consumers to retailers. That’s why Senator Durbin’s attempt to cap credit card swipe fees isn’t just bad policy, it’s literally insane.