Card Wars Part 2: The Merchants Strike Back
Maybe we'll see a "Return of the Consumers" - Part 3 to this series. Durbin Amendment Prequels?
Welcome back to our sequel to last week’s thrilling blockbuster, Card Rewards - the Merchants Strike Back! To recap, last time we gave everyone a recap of the CCCA (Credit Card Competition Act) and talked about what seem to be the loudest voices against it; namely the big two payment networks (Visa and Mastercard) and the issuing banks that support them (which also include a number of credit unions). We also analyzed many of the claims made by this side and provided our own take on them. This time, let’s take a look at the slightly less vocal (in my opinion, yet still formidable) perspectives in support of the bill.
All those in favor…(aka merchants and (*shock*) some rewards-enthusiastic consumers??)
Merchants/Retailers
While it seems like there are precious few voices that seem to actually be in support of the CCCA, it turns out the networks and their issuing allies are probably just really, really loud (and potentially have a lot to lose if this bill passes). Last time we heard from the folks against he bill; this week we hear from the folks in support of it who have also have put out some press releases and editorials outlining their view:
Here’s the original one pager from Sen. Durbin, which is pretty straightforward and lists out the basic arguments in favor of the bill. It’s worth noting that the co-sponsor of the bill is Roger Marshall, a Republican senator from Kansas.
Here’s a supporting perspective from Jim Kalberloh, a member of the Missouri House of Representatives and a Republican, that appeals to his federal colleagues in the US Senate to sign onto the bill. I think him speaking up about this is quite fascinating; first off he’s not a US Congressman so he has no vote to make on this and thus no real reason to speak up about it; secondly, he represents what you could characterize as a pretty rural part of the state - his district covers territory about an hour and a half southeast of Kansas City, with the largest town numbering no more than 9,000 people. It becomes clear then, that his constituents no doubt comprise a number of rural merchants who are probably thrilled at what the possibility of being able to untether themselves to Visa and Mastercard means, and have probably written him in favor of. Kalberloh himself is a member of the agricultural community and owns a restaurant, so he probably has some stake in the game too. Either way, he provides some perspective that debunks the conventional thinking about who might favor this bill politically.
The National Retail Federation, which is the world’s largest retail trade association and represents 3.8 million retail establishments globally from a diverse category of merchants, put out this piece that systematically pushes back against some of the arguments against the bill that you heard last week from the networks, issuers, and rewards promo sites. This includes the rewards argument, the security argument, and others. And not to be outdone by their rivals, but they have also put out their own website where folks can write to Congress supporting the pro-bill view (although not as catchy as “Hands off my Rewards”). Interesting, as of publication time the “Hands off My Rewards” site is down. The plot thickens!
The American Prospect, a somewhat left-leaning publication, brings the political element into the mix, providing their view that the dialogue around this bill has become poisoned by culture-war related elements.
For consistency’s sake and to align with our piece from last week, let’s take the NRF’s response to the arguments by networks and issuers, and evaluate them one by one - as a disclaimer, I did not read this article before drafting my responses to the claims made last week:
Counterclaim - The truth is that the Credit Card Competition Act would infuse competition into the market…This increased competition could save merchants and consumers over $11 billion annually - While we did talk about the fact that more competition would be in the mix by the entry of Discover and Amex, I have to say that this argument is also fudging the story a bit. What’s not mentioned here is the impact on a number of smaller credit unions and local/regional banks, which are already facing pressure given the flight to larger institutions post-SVB. If they don’t get as much interchange from issuing as they used to, the odds are that they will eventually just stop issuing cards and it will lead to less choices for customers of their bank.
Counterclaim - Banks’ profit margins range from 25% to 30%, while retailers’ profit margins hover around 1.5% to 2.5%. Banks would still be able to pay as much as they want in credit card rewards. And why should consumers — who pay more because of swipe fees regardless of whether they ever redeem a cent in rewards — pay for banks’ marketing program? - The 25-30% figure does indeed exist and is supported by a 2022 study. I was ready to question it, but was able to find this on my own - it does bring up another point, that the NRF could do a better job of citing these numbers from somewhere. The research paper that the network/banks published was well-researched and cited.
Counterclaim - Because of their small volume, small businesses pay the highest swipe fee rates but have the fewest resources to fight back against global credit card networks and Wall Street banks - I can’t really argue this point. They also cite a quote from Visa’s CFO that touts inflation as being a good thing for their business from a January 2022 earnings call - I studied the call transcript to see if there was anything the NRF took out of context, but the comment basically speaks for itself.
Counterclaim - Visa and Mastercard — which control the two industry bodies that set security standards — focus on entrenching their dominant market share rather than working to enhance security. They have even allowed China UnionPay to have a seat on those bodies, essentially granting a Chinese government-controlled entity access to American consumers’ most secure data - One of the bodies referenced is EMVCo, which goes out of its way to state that it does not mandate any specifications - although it would be fair to say that it influences how the industry will operate from a technical perspective. The other point left out is that EMVCo is co-led equally by not just Visa and Mastercard, but also Discover, JCB, Amex, and UnionPay. Lastly, it really isn’t possible for China UnionPay to get access to consumer data unless the customer actually uses a UnionPay card.
Counterclaim - The truth is that not a single community bank or small credit union would be affected by the legislation - There is a long explanation offered here that makes the case for why this isn’t exactly true - while the small bank or credit union doesn’t have to adopt the second network; this view doesn’t account for the fact that Visa and Mastercard may decide to increase their prices for interchange anyway and make up the lost cost from competition from smaller credit unions. They would then be faced with the choice to suck it up, or have to put in time, effort and cost to switch to or create operability for Discover, Amex, or another network.
I’ll admit, it was a bit challenging for me to step into the shoes of the other side and push back against the arguments made by the retail/merchant side, but I think I did a pretty good job. What about the consumer, though?
Consumers
I visited some of my favorite places to go to on the web to get the consumer perspective - and they tend to cover both sides of the spectrum generally - in this case, it’s Reddit and YouTube. Generally, I’ve noticed Redditors tend to lean a little more to the left, while YouTube commenters tend to lean a little bit more to the right. I’ll let the comments speak for themselves; I found them both to be surprisingly one-sided in a pretty clear direction:
(Probably one of the few instances where I found an example of a thread/subreddit that seemed to be against the bill - after this point, it tends to skew in favor of the bill on both platforms, with YouTube comments coming in response to a video featuring "The Points Guy" (and here's the Reddit thread I referenced otherwise))
As you can see, surprisingly self-aware perspectives from all ends of the spectrum. Folks are beginning to realize that merchants getting a break on fees is ultimately more important than a small number of rewards - if anything, the larger institutions that offer rewards programs to the affluent will probably have to curtail those - the average consumer clearly doesn’t seem to place that great of a dependency on these programs (given they require a massive amount of expenditure anyway to be meaningful).
Conclusion (analysis)
I think in hearing the arguments from both sides of this bill, the thing that really stood out was how (as with anything) there are pros and cons to it. I was able to see holes in arguments presented by both sides of the equation. Some folks would come out on top, and others would be impacted. However, what was refreshing was the consumer view, which seemed to have the most nuance. Many times, large corporations (whether FIs or merchants) and the government don’t give the consumer enough credit - they are smart and can see through all the posturing. Whether or not the bill passes, I think that bodes well for the future in many ways.