What potential credit legislation could mean for Visa and Mastercard – and you

Credit card companies appear to be under the political microscope 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 indicated that Senator Dick Durbin, a Democrat from Illinois, and Senator Roger Marshall, a Republican from Kansas, were planning a bill that would seek to introduce alternative routing options for merchants when consumers pay with multiple Visa V cards,
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credit cards.

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

Merchants have a contentious relationship with the card industry, and are fueling anger over the increases in fees they are required to pay members of the financial system when consumers purchase cards. Visa and Mastercard set the interchange fee, which merchants pay to the banks that issue the cards. Merchants also incur network fees that go to Visa and Mastercard.

Retailers argue that card fees are excessive and that while consumers do not pay the fees themselves, they may feel the pinch if merchants have to raise prices for goods or services to offset processing costs.

Doug Cantor, president of the National Convenience Store Association, said in written testimony ahead of a Senate Judiciary Committee hearing in May on withdrawal fees.

However, players in the financial industry see fees as necessary to account for the risks they take in facilitating transactions and the infrastructure they provide that moves money.

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

According to analysts, whether any potential credit-related legislation will actually be passed is an open question.

“We are skeptical that a bill directly targeting Visa and MasterCard could become law without a long-running bitter battle,” wrote Ian Katz, managing director of Capital Alpha Partners, a policy research organization. “It’s hard to think that it could pass through Congress this year.”

Katz added that the Wall Street Journal reported that the potential bill would not fall within the jurisdiction of the Durbin Senate Judiciary Committee.

“It is not clear whether this will be a top priority for Senate Banking Chairman Sherrod Brown, D-Ohio,” he wrote. “Maybe less so for Senator Tim Scott, RS, who will likely be the next committee chair if Republicans win the Senate.”

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

He continued, “At the same time, we note that the road to final passage and implementation remains long and uncertain.” “We would expect, most likely, an approach to attach the legislation to a larger vehicle (as was the case with the 2010 Durbin Amendment to the Dodd-Frank Act).”

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

“For merchants, well, the big ones can benefit, since they have very specific and transparent pricing in terms of the exchange, while the small and medium businesses [small- and medium-sized businesses]Those who suffer the brunt of the higher fees are likely to find separate fees charged to them in a less transparent way, wrote Daniel Berlin, an analyst at RBC Capital Markets, who the article refers to as those suffering the brunt of the higher fees.

Regarding how any law would affect consumers, Berlin noted that issuers may charge new annual fees on credit cards. Banks and other financial companies that issue credit cards say the interchange fee helps fund the rewards. This is one reason why debit cards, which are subject to exchange caps, rarely offer perks, unless they are issued by smaller banks.

Perlin writes that the proliferation of cards that carry more fees “could be a credit deterrent to less affluent consumers.” And if issuers choose to roll back the bonuses because of the lower exchange, he sees the potential for providers who buy now and pay later will benefit from a weakening of the traditional credit value proposition.

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