WASHINGTON–The retail industry continues to control much of the discussion around interchange in payments, but one analyst is suggesting recent gains made by financial institutions may be lost, depending on the result of the upcoming elections.
Tucker Foote, SVP, head of North America Government Affairs and Global Trade with MasterCard, told NAFCU’s Congressional Caucus that interchange has been a hot button with retailers and merchants for the past 15 years when they first announced that the “moon was going to melt, the sun freeze and oceans dry up” if a cap on card interchange wasn’t put in place.
When that failed at the federal level, Foote told NAFCU’s Congressional Caucus here, the retailers and merchants “sharpened their knives” and built a groundswell of support in individual states for a price cap, which they brought back at the federal level in 2006. They lost again in Congress, but then the 2008-09 financial crisis ushered in a mood of more regulation, including the Durbin Amendment and Dodd-Frank.
“The next thing you know interchange is tied to the crisis,” said Foote. “The message from merchants was somehow that interchange is the same as the subprime loan.”
Where Merchants Were Smart
Foote noted that the Durbin Amendment was not initially intended to apply only to debit, nor was there supposed to be a carve-out for smaller institutions.
“But the merchants were smart enough to figure out they could push this through politically. The merchants went back home to the states and started dropping bills at the state level with new messages around interchange, including being able to discriminate on the type of card. So what big event could they tie themselves to next? The EMV migration, so they began attacking the EMV migration. It’s an easy talking point.”
Foote said that 88% of MasterCard cards in circulation are chip-enabled. He said two-million merchants are currently EMV enabled.
What’s the environment on Capitol Hill like now?
Foote pointed to legislation in the current Congress from Rep. Randy Neugebauer (R-TX) that would repeal Durbin, and the CHOICE Act from Rep. Jeb Hensarling that would repeal Dodd Frank, both of which passed out of committee but which are going to die in the current Congress.
“This has been brought into the limelight. This fight was brought to us by the merchants,” said Foote. “But the focus now is on repealing rather than expanding. We don’t think it’s going to diminish the merchants’ desire to go forward.”
Three Buckets & A Red Flag
Foote told the Congressional Caucus he believes merchants are more motivated than ever to keep attacking. He divided those attack issues into three buckets:
1. Cost. “It’s a general bucket of interchange is too expensive, EMV migration is too expensive. They point to $50 billion in fees. But what’s skyrocketing is their sales.” Rewards programs also fall into the cost bucket, he said, with merchants arguing its rewards cards mean subsidizing the rich by taxing the poor.
2. The benefit to consumers and society at large. “You can make a study say anything you want, and the merchants have done that,” said Foote. “They have a study that says 70% of Durbin savings have been passed back to the consumers, and the other 30% has gone to add 30,000 jobs to the economy in the first year after the Durbin enactment. But when you look at the data, it’s bogus. We’re fortunate in our industry in that the Federal Reserve of Richmond had a study we couldn’t pay for that supports our position. Their study said 75% of merchants kept their prices flat after Durbin, and just 1% of merchants actually reduced costs and passed those savings back to customers.”
3. Competition. Foote said if the merchants can’t win on the facts, they will say the system is rigged against them. “That denies the fierce competition that everyone in this room has in the payments industry,” he said. “To say there’s no competition is simply not true.”
Foote alleged the general counsel of the National Retail Federation has implied that there’s a red flag in interchange, because smaller institutions are able to operate in the black. “He’s saying if credit unions can make a profit, there must be something wrong. That’s wrong and deceitful.”