The Ratings Game: What possible credit-card legislation could mean for Visa, Mastercard — and you

As it stands, when consumers pay with a Visa credit card, merchants typically have to process that through the Visa network, but the Credit Card Competition Act of 2022 would require that merchants get a choice of at least two networks. This would be similar to what’s already required for most U.S. debit cards, due to the Durbin amendment that passed in the shadow of the financial crisis.

The Wall Street Journal first reported on the proposed legislation Wednesday.

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 subsidize 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.”

Mastercard Chief Executive Michael Miebach said on the company’s Thursday earnings call that Mastercard would “spend the time and the effort to ensure that everybody is well informed about the puts and takes around this proposed bill.”

Whether any 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 that such a 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, R-S.C., who would almost surely be the next committee chairman if the Republicans win the Senate.”

Raymond James analyst Ed Mills, who follows Washington policy, took a similar view, while noting that lawmakers found themselves in a politically tough spot in the wake of the Durbin amendment as they were forced to choose sides between the powerful banking and merchant lobbies.

“The amendment triggered a years-long fight over the potential repeal and implementation of the provision, with many members looking to avoid additional votes on the topic,” he wrote. “We see extremely limited political appetite in Congress (outside of Durbin) to re-litigate this topic.”

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).”

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Analysts were also unsure whether 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 [WSJ] 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.

An attempt to enable alternative routing would also complicate the rewards landscape if issuers weren’t always able to get the interchange they’ve become used to today, according to MoffettNathanson’s Lisa Ellis.

“So issuing banks would likely be unable to offer many of these amenities in instances where a credit transaction is routed over a different network,” she wrote. “This inconsistency in consumer value proposition (sometimes the consumer gets these features, sometimes they don’t) would likely confuse consumers and trigger consumer backlash.”

Bernstein’s Harshita Rawat saw other logistical challenges to implementing a card-routing bill, including because it would not be a “trivial task” for players to build out alternative credit-routing networks.

“Unlike debit cards (where a dozen PIN debit networks existed for choice of routing), credit cards currently don’t have several different networks to support them other than Visa, Mastercard, American Express and Discover,” she wrote.

Further, the alternative PIN networks that exist in the debit market “tend to be sub-scale and typically under-invested (vs. say V/MA) so it is unclear to what extent they can invest to compete,” she continued.

While Rawat agreed with others that it was unclear whether there would be enough political interest to pass such a bill, she thought that any credit-routing changes would have only a limited impact on revenue for Visa or Mastercard if enacted—perhaps 0% to 3% of revenue.

“Finally, interchange is a far bigger component of credit cards (vs. debit cards) so it is possible that a routing choice (which will likely ensue competition on interchange) hurts issuers more than the networks,” she wrote.