Durbin Remains Persistent – And Misguided

Senator Dick Durbin (D-IL) deserves credit for persistence. He successfully introduced new regulations and price controls in the debit card market in 2010, and he’s consistently tried to expand both in the credit card market ever since.

The fact that the 2010 Durbin amendment led to the virtual disappearance of debit card rewards programs and no-fee checking accounts, without delivering the lower retail prices supporters touted, hasn’t deterred him. (For more on the harmful consequences, see here, here, here, here, and here.)

He’s at it again, and already has a few cosponsors, including the new Republican Senator from Ohio, J.D. Vance. The problem is that this effort was misguided in 2010, and it’s just as misguided now. The new Credit Card Competition Act contains the same harmful policies.

Specifically, Durbin and Vance want to impose price controls and routing requirements that essentially force companies to offer comparable services provided by their competitors. Only politicians would be so bold as to promote such a policy and call it pro-competition.

But there’s really nothing new here. Vance isn’t the first Republican to favor price controls in the card markets, and all the previous arguments against Durbin’s anti-consumer efforts still apply.

For starters, Visa
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and MasterCard
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do not have a duopoly, where two companies have virtually the entire market. Prior to the Durbin amendment, there were 15 card networks. Since 2016, there’s still no duopoly. A look at just the credit card market – rather than the combined credit and debit card market – shows Visa has about a 50 percent market share (by volume), while Mastercard and American Express
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have roughly 20 percent each. And Discover, the fourth largest card network, has been growing slowly and steadily.

The market can also be viewed by the share of Americans that have a particular card. This view shows that Visa has less than a 50 percent share, Mastercard has less than 40 percent, Discover has 18 percent, and American Express has 15 percent. Visa certainly is the larger company, but there is no duopoly in this market in any objective sense.

And even if two card networks did dominate the market, that fact alone would not warrant price controls and routing requirements. If these companies were colluding and fixing prices, thus ripping off America’s retailers, an obvious solution would be to start a new network and undercut their prices.

There are more than one million retail establishments in the United States. If the Durbin-Vance coalition is right, and it’s so easy to run a card network while charging dramatically lower prices, these store owners are leaving billions on the table. Given their familiarity with electronic payments, it’s a no-brainer to start their own payments association, much like banks did to form the Visa network in the 1970s.

That’s competition. Provided, of course, the new company remains free to charge whatever price they prefer.

But Durbin and his cosponsors don’t want to go that route. It’s very difficult to avoid being cynical here, especially since the only support for extending this policy to the credit card market comes from the retail trade associations. There’s nothing pro-consumer about giving retailers a legal mandate over how consumers pay for their purchases, and there’s zero evidence such a requirement would result in consumer savings.

It’s also easy to be cynical when the joint press release for the new bill claims “Visa and Mastercard…. will not negotiate with Main Street merchants.” Given this fight has been going on since at least 2010, and both sides regularly visit their offices, the cosponsors must be fully aware the card networks generally have no relationships at all with merchants. The networks are effectively middlemen, and the retailers deal with their banks.

That kind of language in the press release only serves to cast Visa and Mastercard in a sinister light.

Objectively, the Credit Card Competition Act is a terrible public policy because it implements a price control, something which discourages competition. The same goes for requiring a company to offer a competitors’ services. Both types of government mandates harm consumers.

If Congress moves forward with this idea, consumers will lose. Banks will make up the cost however they can, whether by charging higher fees or eliminating rewards programs. And fewer companies will invest in new and improved networks because it will be more difficult to earn a profit, thus keeping the U.S. payments system technologically stagnant.

As I’ve argued multiple times, if Congress wants to help consumers by encouraging competition and innovation, it will repeal the Durbin Amendment, not extend its provisions to the credit-card market.