Business Owners and Consumers Need to Pay Attention to what is happening in Congress!

Visa and MasterCard, two of the world’s leading payment giants, are currently facing various challenges in the ever-evolving landscape of the American financial system. As they grapple with legislation such as the Credit Card Competition Act and the regulation of debit routing from the Durbin Amendment, the temptation to raise rates may seem like a quick solution to maintain consistent returns. However, it’s essential to consider the broader implications of such a move and why it’s in the best interest of these companies and the American financial system to avoid this path.

The Golden Goose Analogy

Like any business, Visa and MasterCard are obligated to their shareholders to achieve consistent returns. But there’s an equally important obligation not to kill the proverbial goose that lays the golden eggs—the largely unregulated US payments market.

In recent years, the payments industry has seen significant innovation, and there are ample opportunities to increase earnings without upsetting the fruit basket. While shareholders seek profits, it’s crucial to strike a balance that ensures the long-term stability of the payment’s ecosystem.

The Washington DC Challenge

Visa and MasterCard currently find themselves in a battle in Washington, DC. Stories of banks being fined millions of dollars and articles criticizing the high cost of credit card acceptance dominate the media. However, it’s essential to recognize that many complaints come from large chains, which might not represent the complete picture.

The Durbin Amendment, backed by influential figures with ties to retail giants like Walmart, is not necessarily aimed at helping small business owners. Instead, it reflects the interests of more giant corporations. In this context, raising rates would not serve the broader interests of the American financial system. Still, it might cater to the demands of a specific group.

The Changing Landscape of Merchant Processing

The landscape of merchant processing is evolving rapidly. More and more businesses opt for flat-rate processing by partnering with Fintech companies or implementing 0% processing fees and passing the cost onto consumers. This trend has prompted the card brands to adapt, resulting in record profits.

Visa, for example, reported a gross profit of $31.831 billion for the twelve months ending June 30, 2023, marking a 13.35% increase year-over-year. Similarly, Mastercard reported a gross profit of $6.269 billion for the June 30, 2023 quarter, with a 13.06% increase year-over-year for the twelve months ending June 30, 2023.

The Potential Consequences of Rate Increases

If Visa and MasterCard were to raise rates, and continue this practice of doing this twice yearly, it could encourage further legislative efforts like the Credit Card Competition Act and multiple attempts to pass such bills. While ISOs, Agents, FinTech’s, and card brands may adapt to new language to preserve profits, this would create an environment of uncertainty and instability within the industry.

Moreover, when banks are already under pressure from Congress regarding their finances, rate increases would have significant implications. It could dent bank profits and further exacerbate the challenges faced by the American financial system.

The Losers – Small Business

The Credit Card Competition Act (CCCA) is expected to impact small businesses notably. While it intends to foster competition and protect consumers, some small businesses may need help obtaining credit cards under these regulations. Responding to the reduced revenue generated from interchange fees as mandated by the CCCA, banks might lower credit limits to mitigate their losses. This could limit the available credit for small businesses, making it harder for them to manage their finances and invest in growth. Additionally, with banks seeking alternative revenue sources, interest rates on credit cards could increase significantly, posing a financial burden on small businesses that rely on credit for operational flexibility. Overall, while the CCCA aims to level the playing field, its consequences for small businesses may involve tighter access to credit and increased borrowing costs.

The Losers #2 – Consumers

The Credit Card Competition Act (CCCA) is poised to bring significant changes to the credit card landscape, and consumers may have to bid farewell to some of the perks they have come to enjoy. With banks anticipated to lose billions in interchange income, they may need help to sustain the lucrative rewards programs, cash-back offers, points, miles, and other benefits typically associated with credit cards. As a result, consumers might experience a reduction in the attractiveness of credit card offerings, seeing fewer opportunities to earn rewards or receive valuable incentives. This shift could lead to a more modest credit card market, where consumers may need to reassess their payment strategies and adapt to a new financial landscape with potentially fewer incentives and perks at their disposal. The original Durbin Amendment did the same thing to debit cards!

Losers Part 3 – Financial Institutions, Consumers, and Businesses!

The Credit Card Competition Act (CCCA) is set to profoundly impact various financial institutions, ranging from traditional banks and credit unions to emerging players like Neo Banks and Fintech Banks. As the CCCA aims to curtail interchange income, financial institutions across the spectrum will likely witness a significant reduction in revenue. To offset these losses, many may pass on the financial burden to consumers and business owners by introducing additional fees on bank accounts, loans, and other banking services. This could lead to a shift in the cost dynamics of banking, making it more expensive for customers to access essential financial services. As a result, financial institutions will need to adapt to a new regulatory landscape, potentially reshaping their business models to remain competitive while navigating the challenges posed by the CCCA.

Winners?

The big companies that are backing Durbin – Walmart and other big companies who saved millions on round one of the Durbin Amendment are the ones who will benefit, while most businesses will see little to no relief. These big companies all came out and said they would lower prices and those promises were never kept.

What changes could the card brands make?

Put back small ticket interchange which would help businesses with smaller ticket sizes. That was taken away with the Durbin Amendment and caused those businesses to pay higher fees. The other thing they could do is leave all the talk about surcharging, cash discount and dual pricing and let the free market decide. Let business owners charge a fee if they want and let consumers choose if they want to patronize those businesses or not. The Genie is out of the bottle and it’s too late to put it back in and gas stations have been doing this for years and other business types. Let the consumers decide, the courts have spoken on this!

In the end, Senator Durbin and his gang have yet to learn how the payment network functions! Understandably, Visa and MasterCard have obligations to their shareholders; it’s equally vital for them to consider the long-term implications of raising rates in the current financial landscape. The American economic system, encompassing card processing, banking, and more, is under constant scrutiny and faces numerous challenges. Instead of pursuing short-term gains, it is in the best interest of all stakeholders to maintain stability and foster innovation in the payments industry. This approach will protect the golden goose and ensure the long-term health of the American financial system.

Durbin and his fantasy – Here is the Truth!

Critics argue that no tangible solutions have emerged despite Senator Durbin’s persistent discussions about the need for new “Debit” rails and the concept of a 3rd network to compete with Visa and MasterCard as part of the Credit Card Competition Act. Since the original Durbin Amendment was passed in 2010, there has been a lack of concrete initiatives or companies stepping forward to fill this void. The absence of an alternative Debit network or a viable 3rd rail for credit cards raises questions about the feasibility and profitability of such endeavors. Critics contend that Senator Durbin’s continued emphasis on these “Fantasy Networks” appears disconnected from the reality that no entity has found it viable to invest in or develop new payment networks in the current financial landscape. This perspective calls for a more transparent discussion on the practicality and necessity of such alternatives in today’s market.