I’ve given several talks over the years at CardCon. Last year it was a deep dive into how new programs and card products are constructed, putting together a panel with the head of Air Canada Aeroplan and Head of Loyalty for Bilt. The year before I did a conversation with the executive who launched Chase Ultimate Rewards and who later ran their United portfolio, covering topics like merchant-funded offers and FinTech underwriting.
So when the conference founder reached out to see if I’d come back this year to Nashville and what did I want to talk about, we brainstormed issues to dive deeply into. What would people be writing about, where a deeper understanding would help them do a better job and ask better questions? We settled on credit card interchange legislation, but I didn’t want to give a lecture, I wanted to do a debate to really poke and prod at the issues.
Regular readers know that I think having the federal government force payment networks provide their services to retailers at a lower price is a bad idea. Jason committed to find a strong advocate for the other side. Doug Kantor agreed. General Counsel for the National Association of Convenience Stores, he’s Aaron Eckhart in Thank You For Smoking, the guy the retail industry sends to Congress for this. He’s the guy.
Watching my friend @BeverlyHarzog moderate this debate on the Credit Card Competition Act. We had information about this at lunch, and now we’ve got a debate between @doug_kantor and @garyleff Love the focus on issues at @CardConExpo pic.twitter.com/0ND023lPmt
— Miranda Marquit, MBA (@MMarquit) November 8, 2023
Senators Dick Durbin (D-IL) and Roger Marshall (R-KS) are sponsoring legislation intended to drive down interchange (swipe fees). Merchants get a service – instant payment processing, convenience for their customers who can spend more than just the cash in their pocket. And building a system that allows any card to work anywhere in the world, connecting a customer’s bank with a merchant’s while protecting against fraud and providing financing in the process has been a successful business. Retailers argue that no business should earn 28% margins or higher.
It’s a bit odd because they’re not calling for price caps on Microsoft Office and cloud services (70%+ margins) or for that matter requirements that as the price of the products they sell fall at the wholesale level (think printer ink cartridges!) that those have to become less expensive to consumers.
This is about using government to take from one company to another, but retailers have to couch this as having public benefit, so they claim it’s really about lowering prices.
I went down a rabbit hole recently trying to figure out how this was supposed to lower prices. Already card acceptance is generally cheaper than cash.
- Cash usually requires people (labor cost) to accept
- Clerks make incorrect change
- Clerks stick cash in their pockets
- Heavy cash businesses often face higher insurance costs
- The cost to accept cash is often estimated at 4% – 9%, higher than card swipe fees
If anything, card payments – where consumers also tend to spend more – subsidize cash payments. Yet some retailers do favor cash. Often that’s a surprise fee customers aren’t expecting, a junk fee to charge more to the majority who pay by card. Other retailers prefer cash because it makes tax fraud easier. Card payments also facilitate electronic point of sale systems which are labor-saving as well.
Kantor had written a piece in American Banker last month arguing not that prices have actually fallen in the past, but that they would have risen more without the Durbin amendment that capped debit card interchange.
- Durbin also limited access to bank accounts for the poor. Banks used to make money when customers would spend money out of their accounts with debit. When that was no longer profitable, banks weren’t bringing in enough to cover the cost of servicing free accounts for many customers, so they started adding other requirements for free checking (like direct deposit, minimum balances) that pushed customers out of banking.
- And it largely eliminated debit card rewards, the rebate customers saw from their transactions.
But he cited the Federal Reserve on the issue, and I’m just neurodivergent enough to really try to track down the substantiation for the claim. His piece linked not to the study backing it up, but to the lobbying group pushing for the law. And their site included a Fed reference, but only for cost incidence of fraud. For lower pricing they’d funded their own study from a consulting firm, which in turn cherry picked data, finding lower prices in only one vertical, retail grocery (selling the same items in close physical proximity to competitors, when wholesale prices fall consumer prices usually follow) and a second from a political shop that didn’t actually look at card processing costs.
Without this claim, though, we wouldn’t even be talking about card interchange – there needs to be a promise of public benefit.
Really enjoyed @garyleff making his debate opponent confirm the studies he quoted in the footnotes of a position paper were really not studies all.
I never doubted that Gary reads the footnotes. pic.twitter.com/T5aayiqYG1
— Richard Kerr (@KerrPoints) November 9, 2023
In Australia, where interchange was capped, we saw higher card annual fees and caps on rewards (we also saw Qantas significantly devalue its points, so that cards could still earn one point per Australian dollar spent). Higher card acceptance costs are bad for both consumers and the economy. People still need credit, it’s less available, and available through other providers (like payday loan shops) at higher cost.
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.
U.S. airlines are saying that interchange limits would destroy rewards, but that’s not exactly right.
- The current proposed law probably doesn’t eliminate rewards, just as it hasn’t in Europe and Australia, though Kantor conceded that they want to go further than the current legislation under consideration.
- Airlines oppose the law because it guts rewards, not because those go away entirely. Even profitable Delta earns most of its net profit (e.g. ~ $2.2 billion out of $2.9 billion last year) from card rewards.
- Without these rewards we’d have fewer major airlines. 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.
- Southwest Airlines said a big driver of its Hawaii expansion was to make its co-brand card attractive to customers. They’ve become not just a significant carrier to and from the islands but also a major inter-island airline as well. They were crucial during the Lahaina fires in West Maui.
Card, and interchange, are so woven into the fabric of the economy that it’s difficult to even predict the damage of redistributing money to retailers. And it comes at the cost of consumers, rather than their benefit – and not just in terms of credit availability.
To compete for customer business, cards often provide much better consumer protections than what’s required by law. That can mean extended warranty and purchase protections, but even more frequently $0 fraud liability (and unlike debit, funds haven’t already left your account with fraudulent charges) and the ability to charge back to merchants not just for a couple of months as required but for as much as 18 months. Less profitable products won’t compete for consumer dollars in the same way.
There were issues we didn’t get into. I expected Kantor to make the ‘reverse Robin Hood’ argument that card payments redistribute income from poor to rich, which isn’t true since card acceptance is cheaper than cash, since interchange regulation doesn’t lower prices, and since the study the retail industry usually relies on is highly misleading. (Redistribution with card actually takes place in some cases, but between those who don’t pay off their cards each month to those who do.)
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. What it is, though, is the perfect fundraiser for politicians going into 2024 elections. It raises big dollars from both retailers and financial services for both Democrats and Republicans. Rather than Thank You For Smoking the better analog may be Eddie Murphy’s The Distinguished Gentleman.