May 4 Interchange Fee Hearing: The 5 Things You Need to Know

On Wednesday, May 4, the U.S. Senate Committee on the Judiciary will hold a hearing on “Excessive Swipe Fees and Barriers to Competition in the Credit and Debit Card Systems,” where representatives from Visa, Mastercard, retailers and consumer advocacy groups will likely discuss the benefits and risks of imposing legal caps to credit card interchange fees.

This hearing comes just one week after the card network companies announced they are increasing their credit-card swipe fees, which average 2,22% of transaction amounts, according to the Nilsen Report. This increase was expected two years ago, but the companies delayed their plans due to the impact of the pandemic on businesses.

Retailer lobby groups have urged Congress to investigate Visa and Mastercard’s position over the credit and debit card markets. Regulators haven´t taken any specific action against the companies. Consumer Financial Protection Bureau Director Rohit Chopra has already expressed some concerns. “I don´t really think we have a competitive payment system. I’ll say this: when prices rise in tandem by dominant firms, that always raises red flags for regulators,” Chopra said.

The hearing will likely focus on the possibility of extending existing regulation on debit card swipe fees to credit cards rather than specific actions against the companies. These are the five things you should know before the hearing begins:

Debit Card Fee Cap (Durbin Amendment): In 2012, Sen. Dick Durbin introduced an amendment to the draft bill to regulate debit-card interchange fees by imposing a cap on the fees that card companies and banks could charge when consumers use debit cards. The Federal Reserve subsequently established this cap at 24 cents per transaction (around 45% lower than the average fee at that time).

Overall Impact on Consumers from debit card cap: The effect on consumers isn´t straightforward. On the one hand, consumers may gain from cost savings passed on by merchants, although this depends entirely on the merchants’ decision to lower their prices. On the other hand, consumers may also lose from cost increases passed on by banks or from losing some services (i.e., discounts, rewards, low cost/free accounts). Some reports from economic experts suggest that the overall effect of the Durbin amendment is negative for consumers, estimating a loss of up to $25 billion.

Debit vs. Credit Cards: While the two products may seem similar to some consumers, credit cards represent an unsecured credit to a consumer — a loan — to purchase goods or services. Banks and credit cards assume a risk when they provide this service and do it in exchange for a fee. Expanding the Durbin amendment to the credit market may also affect people´s access to low-cost loans.

Competition in Payments: Legislation in this space may not necessarily benefit consumers, but more competition will. Possible gains for merchants with any new legislation that isn´t clear will be passed on to consumers. However, new payment offerings flourishing in the U.S. like Buy Now Pay Later (BNPL) or real-time payments are increasing the competition in the payment market, and this may have a positive effect on consumers with more choices and better prices.

Europe’s experience shows mixing results: The European Commission passed legislation in 2015 to cap credit card swipe fees. In 2020, the commission evaluated the impact of this law on the market. The results showed that interchange fees for card-based payments were reduced and merchants´ cost of accepting card payments declined. However, acquiring margins and scheme fees from international card schemes increased, reducing some of the benefits.

Read More: The Impact of Merchant Surcharges on Cardholder Satisfaction