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Senators Richard Durbin (D-Ill.) and Roger Marshall (R-Kan.) recently introduced the Credit Card Competition Act, which would effectively enable merchants to route credit card transactions . . .
Senators Richard Durbin (D-Ill.) and Roger Marshall (R-Kan.) recently introduced the Credit Card Competition Act, which would effectively enable merchants to route credit card transactions over a network other than the main one affiliated with the card. The sponsors say that this will increase “competition” and reduce costs for merchants, who will pass on the savings to consumers.
But are Durbin and Marshall being overly optimistic? Have they perhaps missed some predictable but unintended consequences that might cause their act to harm rather than help consumers?
We hope you will join our esteemed colleagues Julian Morris and Todd Zywicki for a timely discussion of this proposed legislation.
Presentations & Interviews Sens. Richard Durbin (D-Ill.) and Roger Marshall (R-Kan.) recently introduced the Credit Card Competition Act, which would effectively enable merchants to route credit card transactions . . .
Sens. Richard Durbin (D-Ill.) and Roger Marshall (R-Kan.) recently introduced the Credit Card Competition Act, which would effectively enable merchants to route credit card transactions over a network other than the main one affiliated with the card. The sponsors say that this will increase “competition” and reduce costs for merchants, who will pass on the savings to consumers.
The International Center for Law & Economics hosted an Oct. 25, 2022, webinar panel to offer a timely discussion of the proposed legislation, moderated by ICLE Director of Innovation Policy Kristian Stout and featuring Senior Scholar Julian Morris and Academic Affiliate Todd Zywicki.
https://www.youtube.com/watch?v=ugcvlFwq2IU
TL;DR On Oct. 7, President Joe Biden signed an executive order to implement the U.S.-EU data-privacy framework.
On Oct. 7, President Joe Biden signed an executive order to implement the U.S.-EU data-privacy framework. The order had been awaited since March, when U.S. and EU officials reached an agreement in principle on a new framework, which EU officials insist must address concerns about surveillance practices by U.S. agencies. An earlier data-privacy framework was invalidated in 2020 by the Court of Justice of the European Union (CJEU) in its Schrems II judgment.
The European Commission will now consider whether to issue an “adequacy decision” for the U.S. This is urgent, because national data-protection authorities in the EU have been using a strained interpretation of the EU General Data Protection Regulation (GDPR) to prosecute various workarounds that companies have employed to transfer data between the U.S. and the EU. Like prior U.S.-EU arrangements, the order is likely to be challenged before the EU courts, but preliminary legal analysis suggests that this one has a greater chance of being upheld.
Read the full explainer here
TL;DR Sen. Richard Durbin’s (D-Ill.) amendment to 2010’s Dodd-Frank Act capped interchange fees on debit cards issued by large banks and required all debit-card issuers to permit routing of payments over multiple networks.
Sen. Richard Durbin’s (D-Ill.) amendment to 2010’s Dodd-Frank Act capped interchange fees on debit cards issued by large banks and required all debit-card issuers to permit routing of payments over multiple networks. Now, he and co-sponsor Roger Marshall (R-Kan.) have introduced the Credit Card Competition Act, which would impose similar routing requirements on credit cards. With the bill having few prospects to move forward on its own, Durbin and Marshall hope to attach it as an amendment to the National Defense Authorization Act.
As with the original Durbin Amendment, the mandate would benefit some competitors but won’t increase competition. Instead, by rigging markets, it will lead to higher costs, less security, and less innovation. Ultimately, consumers will be the losers.
In late August, Roberto Campos Neto, the head of Brazil’s central bank, is reported to have said about Pix, the bank’s two-year-old real-time-payments (RTP) system, that it . . .
In late August, Roberto Campos Neto, the head of Brazil’s central bank, is reported to have said about Pix, the bank’s two-year-old real-time-payments (RTP) system, that it “eliminates the need to have a credit card. I think that credit cards will cease to exist at some point soon.” Wow! Sounds amazing. A new system that does everything a credit card can do, but better.
Read the full piece here.
Popular Media The Dodd-Frank Act’s so-called “Durbin amendment,” passed more than a decade ago in 2010, was supposed to reduce the cost of consumer goods by regulating . . .
The Dodd-Frank Act’s so-called “Durbin amendment,” passed more than a decade ago in 2010, was supposed to reduce the cost of consumer goods by regulating the price and processing of debit-card transactions.
ICLE White Paper ICLE white paper looks at proposals from Congress and the Federal Reserve to mandate routing requirements on credit cards and other payment networks.
Imagine you are at the grocery-store checkout line and it is to pay. You enter your credit card in the terminal, assuming that your payment will be routed over the network operated by the brand on your card (typically Visa or Mastercard). But you learn after the fact that the grocery store has chosen instead to route it over China Union Pay.
Most of us would be uncomfortable ceding to the merchant the authority to route transactions over the cheapest network, without considering our concerns about security, reliability, and other card features (including rewards). Yet that is already the case for many point-of-sale transactions made with debit cards—the result of a 2011 regulation implemented by the Federal Reserve. Consumers can, however, often still force the transaction to run over their preferred network by pushing the “credit” button.
But new rules under consideration by the Federal Reserve would extend merchants’ ability to determine how debit transactions are routed to online transactions, while also making it more difficult for consumers to control who gets to handle their personal data and process their transactions.[1] Perhaps more worryingly, a new bill (the “Credit Card Competition Act”) introduced by Sen. Richard Durbin (D-Ill.) would, in the name of “competition,” impose similar routing requirements on credit cards, while ignoring important differences in the competitive framework of debit and credit cards.[2]
Since they emerged more than 50 years ago, payment-card networks have come to play an increasingly important role in our lives, both directly and indirectly. Directly, they facilitate hundreds of billions of transactions every year, representing tens of trillions of dollars in value.[3] Indirectly, they have contributed to a near-complete shift from paper-based to electronic value exchange and accounting in the United States and many other countries. This has, in turn, resulted in enormous efficiency improvements and wider social benefits, such as the development of online commerce, greater ease of travel, and reduced tax avoidance.[4]
The shift from paper to electronic value exchange has been driven almost entirely by voluntary decisions made by businesses and consumers. Despite such clear evidence of market success, over the past three decades, governments have increasingly sought to correct alleged “market failures” in payment-card markets. The main tool governments have used is price controls on interchange-fee rates. More recently, however, several governments—including the United States, the European Union, and Australia—have sought to reduce rates further still by regulating the manner in which payments are “routed” (i.e., the way that messages pertaining to a transaction are sent between the merchant and the issuing bank). This has important implications for consumer protection, fraud prevention, and financial inclusion.
In previous studies, we have shown that regulation of interchange fees typically has slowed the shift to more innovative, quicker, more convenient payment systems, while also reducing other benefits and particularly harming poorer consumers and smaller merchants.[5]
Prohibitions on exclusivity in routing have similar effects as direct price controls. But imposed routing requirements will have additional effects that go beyond those of price controls and would result in various harms to consumers and the economy. This study seeks to delve deeper into the problem, focusing primarily on the justifications for and effects of regulations that affect the way in which transactions are routed. While “routing” may seem arcane, it is fundamental to the effectiveness of payment networks. Understanding the likely consequences of such regulation is thus important. That is the purpose of this paper.
We begin, in Section II, by describing the technological and economic elements of payment-card routing. Supporters of forced routing requirements contend that they will promote more efficient competition in consumers’ payment-card usage. But we show that this superficial argument ignores the basic economic realities of payment-card networks, as well as the fundamentally different nature of consumer competitive choice, both in debit-card markets (where routing requirements currently exist) and in credit-card markets (the intended target of Sen. Durbin’s proposed law). Section III reviews the evidence regarding the effects of regulating payment networks. We summarize the pernicious effects of price controls and then explain how the routing mandate created by the 2011 Federal Reserve regulation, known as Regulation II, has had similar effects. Section IV considers the proposed changes to Regulation II and the new Durbin proposal to regulate credit-card routing, with a particular focus on the likely harmful effects of the changes on the incidence of fraud and the knock-on effects on issuers, cardholders, and merchants. Section V concludes.
[1] Debit Card Interchange Fees and Routing, FR 26189 (2021), available at: https://www.govinfo.gov/content/pkg/FR-2021-05-13/pdf/2021-10013.pdf.
[2] Credit Card Competition Act of 2022, S. 4674, 117th Cong. § 2 (2022), available at: https://www.congress.gov/117/bills/s4674/BILLS-117s4674is.pdf.
[3] Global Network Card Results in 2021, Nilson Report Issue 1224, https://nilsonreport.com/mention/1672/1link.
[4] See the appendix to this paper and references therein.
[5] See Todd J. Zywicki, The Economics of Payment Card Interchange Fees and the Limits of Regulation, ICLE Financial Regulatory Program White Paper Series (Jun. 2, 2010), available at http://laweconcenter.org/images/articles/zywicki_interchange.pdf; Todd J. Zywicki, Geoffrey A. Manne, and Julian Morris, Unreasonable and Disproportionate: How the Durbin Amendment Harms Poorer Americans and Small Businesses, International Center for Law and Economics (Apr. 25, 2017); Todd J. Zywicki, Geoffrey A. Manne, and Julian Morris, Price Controls on Payment Card Interchange Fees: The U.S. Experience, George Mason Law & Economics Research Paper No. 14-18, (Jun. 6, 2014).
ICLE Issue Brief Introduction Real-time payments (RTP) are an increasingly popular means by which individuals can send credits from one account to another. Many banks have established internal . . .
Real-time payments (RTP) are an increasingly popular means by which individuals can send credits from one account to another. Many banks have established internal RTP systems and, in some countries, these have been extended to other banks through private consortia such as The Clearing House in the United States. Such consortia enable someone with an account at Chase, for example, to send money to someone with an account at Wells Fargo, and vice versa, using their RTP apps.[1]
In other countries, central banks have inhibited the establishment of private RTP networks and have developed their own systems. One such example is Brazil, where the Banco Central do Brasil (“BCB”) has operated the Pix instant-payment system since 2020.
The Bank for International Settlements (BIS), the Basel-based organization that sets regulatory standards for central banks, recently published a paper examining Pix that was co-authored by two researchers from the BCB and three from the BIS.[2] This brief offers some initial thoughts on that BIS paper and on the Pix system more generally.
We begin with a discussion of the economics of payment networks, with an emphasis on the optimal distribution of costs and benefits. Section II addresses cost transparency and apportionment in payment systems run by central banks. Section III critiques several mistaken notions regarding the role of rewards in payment-card networks. Section IV illustrates the conflicts of interest that can arise when a governmental entity such as a central bank competes with the private sector. Section V discusses the inter-related problems of data breaches, inadequate know-your-customer procedures among some Pix-implementing entities, and the phenomenon of “lightning kidnappings.” Section VI compares the operational rules governing the BCB with international good governance. Section VII concludes with a discussion of the wider lessons for governments considering the implementation of RTP systems.
Read the full issue brief here.
[1] RTP Network Participating Financial Institutions, The Clearing House, https://www.theclearinghouse.org/payment-systems/rtp/rtp-participating-financial-institutions (last visited May 18, 2022).
[2] Angelo Duarte et al., Central Banks, the Monetary System and Public Payment Infrastructures: Lessons from Brazil’s Pix, BIS Bulletin no. 52 (Mar. 23, 2022), at 1.
ICLE Issue Brief Executive Summary In 2020, the Legislative Assembly of Costa Rica passed Legislative Decree 9831, which granted the Central Bank of Costa Rica (BCCR) authority to . . .
In 2020, the Legislative Assembly of Costa Rica passed Legislative Decree 9831, which granted the Central Bank of Costa Rica (BCCR) authority to regulate payment-card fees. BCCR subsequently developed a regulation that set maximum fees for acquiring and issuing banks, which came into force Nov. 24, 2020. In BCCR’s November 2021 ordinary review of those price controls, the central bank set out a framework to limit further the fees charged on domestic cards and to introduce limits on fees charged on foreign cards.
This brief considers the international experience with interchange and acquisition fees, reviewing both theoretical and empirical evidence. It finds that international best practices require that payment networks be considered dynamic two-sided markets, and therefore, that assessments account for the effects of regulation on both sides of the market: merchants and consumers. In contrast, BCCR’s analysis focuses primarily on static costs that affect merchants, with little attention to the effects on consumers, let alone the dynamic effects. Consequently, BCCR’s proposed maximum interchange and acquisition fees would interfere with the efficient operation of the payment-card market in ways that are likely to harm consumers. Specifically, losses by issuing and acquiring banks are likely to be passed on to consumers in the form of higher banking and card fees, and less investment in improvements. Less wealthy consumers are likely to be hit hardest.
Based on the evidence available, international best practices entail:
