Card brands postpone fee hike, but merchants want interchange reform

Card brands postpone fee hike, but merchants want interchange reform

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The major card networks have postponed a planned interchange fee hike yet again in light of the reality of an ongoing pandemic, pleas from merchant groups and pressure from Sen. Dick Durbin, D-Ill.

But while this one-year delay provides immediate relief, it doesn’t address the long-term concerns critics have raised over how much power the card networks have in setting merchants’ costs.

“It’s helpful there is a delay, especially since so many merchants are still having trouble due to the pandemic right now … but the whole system should change,” said Doug Kantor, counsel for the Merchants Payments Coalition, a trade group that focuses on interchange costs and its effect on merchants. “The fact that these fee increases were even contemplated at this time demonstrates what a problem there is with the pricing power that Visa and Mastercard wield on behalf of their banks.”

Last week, Durbin openly questioned the card brands’ motives for considering any type of interchange rate hike at this time, as the retail landscape continues to struggle to get its footing during the COVID-19 pandemic.

Durbin, chairman of the Senate Judiciary Committee, accused the card brands of retaliating for the past pricing constraints put on them by the Durbin amendment in 2010, which capped debit card fees and established transaction routing options for merchants. Durbin’s remarks during an antitrust hearing came just days after he and Rep. Peter Welch, D-Vt., had sent a letter to the card brands requesting a delay on the planned hikes.

“Durbin’s comments and his letter with Welch caught the card brands’ attention and made clear that there is continuing interest in long term changes to the fees,” Kantor said. “Really, the banks ought to be setting their own prices, like other businesses do, and competing with each other.”

Durbin’s Washington office did not respond to an inquiry by deadline, but noted it was expecting to deliver a statement from the Senator on the card brands’ decision sometime on Tuesday.

Ahead of this week’s news that the card brands would postpone their deadline, they indicated their plans were something of a compromise, decreasing fees in some areas and keeping card-present rates the same in most cases. The planned changes were already postponed from an original 2020 deadline.

“It’s refreshing to see the networks respond to the marketplace pushback on reimposing interchange rate increases at this time,” said Steve Mott, payments industry analyst and principal of BetterBuyDesign. “Their banks had an awfully good year in COVID overall, and are hardly suffering with the big infusion of higher volumes of higher interchange fees from e-commerce, while consumer defaults on credit cards are way lower than many predicted.”

Mastercard and Visa issued statements regarding the postponement, citing a desire to continue helping merchants during the pandemic and into the future.

“Visa is proud of the role we have played in helping keep American businesses open during this extraordinary time,” Visa said. “We believe the steps we have taken and are taking today will further support the recovery and will benefit businesses and consumers alike.”

Visa noted it made changes to manage interchange in the early days of the pandemic, including an interchange reduction for grocery stores early last summer and deferral of any interchange changes for consumer card-present transactions at retailers. Now, as part of this delay, Visa said it is also postponing adjustments to rates applying to the e-commerce/card not present (CNP) channel until April 2022.

Citing encouraging recovery signs through economic relief and the COVID vaccination process, Mastercard stated: “Mindful that some merchants are still facing unprecedented circumstances — and consistent with our earlier commitment to be thoughtful on the timing of implementation — we are delaying our previously announced interchange adjustments in the U.S. until April 2022.”

Mastercard said it committed $250 million over five years to support small businesses in the U.S. and other markets with “resources to help protect them, including free cyber and identity theft solutions.”

CMPSi, a research firm in Atlanta, estimated that the proposed increases would amount to a $768 million cost increase from Visa’s changes and another $383 million increase from Mastercard for the year. CMPSi acknowledged some free restructuring at various tiers was still taking place; the firm doesn’t comment on card brand decisions and instead focuses on informing merchants of interchange numbers so as to prepare for them.

As expected, merchant groups and retail industry lobbyists were pleased with the decision to delay and indicated a desire to keep working with the card brands and regulators to resolve pricing issues and advance technology.

“We haven’t seen all of the details. However, based on the news, we’re pleased to see Visa and Mastercard recognize the amount of stress merchants are under and appreciate that they have made accommodations to not place additional burdens on merchants,” said John Drechny, CEO of the Merchant Advisory Group. “We will continue to work with all of the networks to help them understand the ongoing challenges merchants face and collaborate on improving the payments landscape.”

Retailers appreciate the pause in interchange rates, but the news could have come sooner, said Austen Jensen, senior vice president of government affairs for the Retail Industry Leaders Association.

“It was ridiculous that this was even being considered during one of the most severe economic recessions we have seen in decades and a global pandemic,” Jensen said. “Only a small portion of the country has received both shots, and we are still facing significant lockdowns and safety requirements.”

Jensen said his group has had several meetings with both political parties on Capitol Hill regarding the interchange issue, and virtually no one felt it was a good time to increase rates.

The decision to delay was a case once again of public pressure just like last year, Jensen suggested.

“Unfortunately, 12 months from now, they will go forward with raising rates again and there is nothing to prevent them from doing so in the future as they have done,” he said. “The underlying problem here is the lack of competition in the credit card market. When you have two dominant players like Visa and Mastercard, they can raise rates whenever they want to.”

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