Durbin robbin’ the hood (again)
By Allen Kopelman, CEO, Nationwide Payment Systems
Imagine Senator Richard Durbin, D-Ill., in cape and tights, once again promising to redistribute credit card wealth to merchants suffering from high fees. If the “Durbin Amendment’s Interchange Fee and Network Non-Exclusivity Provisions” passes, we’ll suffer from more than bad optics.
Durbin wants to allow a “new” network to process cards and stop the card brands from collecting “card brand fees.” While it sounds good in principle, attorneys and big stores would be among the very few to benefit from this wildly implausible proposal.
By the way, who’s even complaining about interchange fees? You can bet it’s not small and midsize businesses (SMBs). It’s just Walmart, Target and a few other big stores that are loudly moaning, as they have done for years, mainly to show how passionate they are about building shareholder value.
Here in the SMB community, I’m not seeing too many Maid Marians looking to be rescued. In fact, I’m not even seeing many organizations actively representing SMB interests. Most SMBs process with payment facilitators (PayFacs), such as market leaders PayPal, Stripe, Square and Shopify, that support millions of SMBs, as well as up-and-comers like Toast, that has 64,000 merchants, according to recent estimates.
In addition to making payment processing simple, fast and easy, PayFacs provide clients with vertical market expertise and a range of benefits beyond speed and convenience. It’s rare for PayFac customers to complain about processing rates or fees. Only big businesses, that negotiate cost-plus pricing with major processors, are complaining about the fractions of percentages they pay.
You break it, you buy it
Let’s talk about Durbin 1.0 – specifically, the Durbin Amendment of the Dodd Frank Act of 2010, and its winners and losers. I’m sure I’m not the only one who noticed when Durbin killed the debit card ecosystem; as others have noted, the legislation was crafted by people who have no inkling of how credit and debit cards work.
It may be hard to remember when everyone profited from debit card usage. Consumer rewards were unlike anything we’ll ever see again – thousands of reward dollars every month, just for using your debit card. That was before we got Friar Tucked.
When “small ticket” interchange was replaced with Durbin fees of .05% and .22 cents, the only winners were big companies that promised to share the spoils with their customers. But that trickle-down effect never happened and SMBs with average sales of under $13 got body slammed. Banks lost revenue and consumers lost debit card rewards, free checking and freebies their banks could no longer afford to provide.
With a less than Medieval understanding of debit card infrastructure, the Durbin Amendment left chaos and destruction in its wake, setting a dangerous precedent for elected officials and regulators around the world.
Crossbows and spears
Does Congress comprehend how credit card processing actually works? After seeing the bill’s cluelessness on interchange basics, I was ready to give policymakers a crash course on Payments 101.
As we’ve seen elsewhere, mandating lower interchange rates doesn’t guarantee lower prices. Consumer prices didn’t drop when Australia tried it. Europe abandoned a similar plan after trying for several years because no one wanted to build another network. In most cases, these initiatives only wipe out or reduce credit card reward programs and raise interest rates.
We’ll have to see what happens in Canada, as new rules go into effect. It’s worth noting that consumers like the built-in protection and rewards programs of their credit cards. Canada has fewer banks than the United States, and in most countries, consumers use secured forms of credit, compared to the unsecured type that U.S. consumers enjoy.
With speculation swirling about what the “Durbin Fantasy Network” will look like, what Durbin is not saying is whether or not this alternative network will process “on-us” transactions, bypassing card brands entirely.
History repeats itself
As history repeats itself, we find regulators trying to fix business models that aren’t broken. In this case, they’re looking to replace a processing network with another one, possibly American Express, Discover, or one of the debit networks. And while I’m not an attorney, I suspect enforcing this plan might violate the U.S. 2006 antitrust ruling.
When financial committees meet in the House and Senate, this popular mantra of Silicon Valley founders and investors bears repeating: “business innovation outpaces regulation.” There’s a serious lack of businesspeople in Congress and those who serve lack the understanding or sense of urgency to appropriately address business issues.
JPMorgan Chase CEO Jamie Dimon voiced his strong opposition to bank-to-bank payments, stating Chase and other financial institutions will lose billions in credit card interchange if peer-to-peer and crypto payments come to the United States. Consider how expensive it would be to implement Durbin’s plan. These other networks would be just as expensive to use, or does he expect competing credit card issuers to negotiate their own network pricing?
Just say no
It’s time to wake up. Each time the Fed raises interest rates, it impacts every credit card in consumers’ and SMBs’ wallets. Inflation is already at a record 8 percent. Considering our current economic situation, if these legislative proposals were to become law, they would drive consumer interest rates even higher.
Durbin’s bill and other initiatives circulating in Congress will harm U.S. business. Consider the 3.8 percent tax on small business income, not profit, which would likely be passed through to consumers. This plan to redistribute credit card interchange fees to consumers and merchants could potentially obliterate a fair, ethical and equitable payments ecosystem.
Durbin 2.0 will knock us back to the 12th or 13th century, only this time around, the outlaw gang from Nottinghamshire won’t be on our side. Robin Hood and his merry flock will be robbing our hard-earned money and giving it back to the rich. And as a result, the biggest retailers in the land will get to shave another fraction of a percent off their already tiny payment processing fees.
Allen Kopelman co-founded Nationwide Payment Systems Inc. in 2001, providing concierge-style credit card processing and equipment to merchants. The company quickly grew nationally, adding products and banking partnerships and becoming laser-focused on technology. As a serial entrepreneur from a family of business owners, Allen first learned about business by working behind the cash registers at his father’s Miami clothing stores. In 2021, he launched the B2B Vault: The Payment Technology Podcast, where he educates merchants, drawing from his experiences as a payments industry consultant, master chef at hotels and country clubs, and former owner of a restaurant and catering company.