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

Credit-card companies look 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 Sen. Dick Durbin, an Illinois Democrat, and Sen. Roger Marshall, a Kansas Republican, are planning a bill that would seek to offer merchants alternate routing options when consumers pay with many Visa V,
and Mastercard MA,
credit cards.

As it stands, when consumers pay with a Visa credit card, merchants typically have to process that through the Visa network, but the reported legislation would allow for processing over unaffiliated networks. This would be similar to what’s already required for most US debit cards, due to the Durbin amendment that passed in the shadow of the financial crisis.

Merchants have a contentious relationship with the card industry, chafing at increases to the fees that they’re required to pay members of the financial system when consumers make card purchases. Visa and Mastercard set interchange fees, which merchants pay to card-issuing banks. Merchants also are charged network fees that 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 increase the prices of goods or services to compensate for processing costs.

Customers without credit cards or banking relationships “basically subsidized credit card usage by paying inflated prices – prices inflated by the billions of dollars of anticompetitive interchange fees,” Doug Kantor, the chairman of the National Association of Convenience Stores, said in written testimony ahead of a May Senate Judiciary Committee hearing on swipe fees.

Financial-industry players, however, see fees as necessary to account for the risk they take on in facilitating transactions and the infrastructure they provide that moves money along.

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

Whether any potential credit-related legislation would actually pass is an open question, according to analysts.

“We are skeptical that a bill taking direct aim at Visa and Mastercard could become law without a protracted, bitter battle,” wrote Ian Katz, managing director of Capital Alpha Partners, a policy-research organization. “It’s hard to think it could get through Congress this year. “

Katz added that the Wall Street Journal mentioned a potential bill likely wouldn’t fall under the purview of Durbin’s Senate Judiciary Committee.

“It’s not clear that this would be as high a priority for Senate Banking Chairman Sherrod Brown, D-Ohio,” he wrote. “It probably is even less so for Sen. Tim Scott, RS.C., who would almost surely be the next committee chairman if the Republicans win the Senate.”

Barclays analyst Ramsey El-Assal highlighted that the senators seem to be pushing for measures around card routing rather than interchange caps, a strategy that “could see broader bipartisan appeal.”

“At the same time, we note that the path to eventual passage and implementation remains lengthy and uncertain,” he continued. “We expect, potentially, an approach to attach the legislation to a larger vehicle (as was the case with the 2010 Durbin Amendment to the Dodd Frank Act).”

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

Analysts were also unsure whether potential legislation would have the intended consequences if enacted.

“For merchants, well, the large ones could benefit, as they have very specific and transparent pricing in regard to interchange, while SMBs [small- and medium-sized businesses]which the article cites as the ones suffering the brunt of higher fees, would likely find separate fees levied on them in a less transparent fashion,” wrote RBC Capital Markets analyst Daniel Perlin.

In terms of how any law might impact consumers, Perlin flagged that issuers might tack new annual fees onto credit cards. Banks and other financial companies that issue credit cards say that interchange fees help fund rewards. That’s one reason why debit cards, which are subject to interchange caps, rarely offer perks, unless they’re issued by smaller banks.

A greater prevalence of fee-bearing cards “could prove to be a credit deterrent for less affluent consumers,” Perlin wrote. And if issuers opted to pull back on rewards due to lower interchange, he sees the possibility that buy-now-pay-later providers could benefit from a weakening of the traditional credit value proposition.


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