Durbin 2.0: Competition for Credit Card Networks on the Horizon?

Only July 28, 2022 the Credit Card Competition Act of 2022 (S. 4674) was introduced into the U.S. Senate, and was referred to the Committee on Banking, Housing, and Urban Affairs, where it currently sits. The stated purpose of this bill, according to its sponsors, Senators Durbin (D-IL) and Marshall (R-KS) is the enhancement of competition and choice in the credit card network market.

There are currently four credit card networks in the U.S., with Visa and Mastercard being the largest and together accounting for nearly 83% of general-purpose credit cards, with American Express and Discover sharing the remainder. Visa and Mastercard are “four-party” networks, with the four parties being the cardholder, the card-issuing bank, the merchant, and the acquirer. In these transactions Visa and Mastercard act as agents for thousands of card-issuing banks and set the fees that the network and the bank receive for each transaction. The transactions on the Visa and Mastercard networks earned those two networks a combined $77.48 billion in fees collected from U.S. merchants in 2021. American Express and Discover are “three-party” networks in which the card-issuer and acquirer are the same entity.

For debit cards (as opposed to credit cards) banks commonly issue debit cards with either Visa or Mastercard but there are also smaller networks with names like Pulse, Shazam and Star which charge an estimated 10 cents less per transaction than Visa or Mastercard. Each use of a debit or credit card generates fees for the payment networks, which are normally collected by banks, which retain their portion and pass most of it to the network, most often Visa or Mastercard.

The Credit Card Competition Act would require that banks with more than $100 billion in assets ensure that their credit cards provide a choice of at least two networks that can be used to process these transactions, at least one of which must be outside of the top two largest networks. If this sounds somewhat familiar, it was this same Sen. Durbin who added an amendment to the 2010 Dodd-Frank Act that required banks to include two unaffiliated networks with every debit card they issue. So, this isn’t the first time that Senator Durbin has been tied to legislation related to payment networks and their associated fees.

A provision of the Credit Card Competition Act that was not part of the 2010 Durbin Amendment is a requirement that banks accept practically any kind of transaction, which could functionally require financial institutions to onboard potentially many more than just two networks, including unregulated networks, such as China’s UnionPay, India’s RuPay or Nigeria’s Verve International. Merchants will have the ability to choose which network handles their transactions and may choose alternative networks, such as those with lower fees.

Supporters of this bill, which has been referred to as “Durbin Amendment 2.0,” claim that the proposed changes will result in lower fees paid by merchants which will in turn lead to lower prices for consumers.  Critics of this bill argue that although this bill could lower fees for merchants, it would also reduce revenue for card-issuing banks and could also potentially harm consumers. Unfortunately, some alternative networks could have lower security standards and may be a bit riskier for consumers.  Additionally, many of the benefits and rewards offered to card holders are provided due to the fees made on card transactions. By reducing these fees, card issuers may limit or eliminate rewards programs or consider annual fees for such programs.