[…] On July 28th Richard Durbin, the same Democratic senator who regulated debit interchange a decade ago, introduced the Credit Card Competition Act (ccc). It does not propose a cap on interchange, as the debit rule does, since costs for credit cards are more variable than for debit cards, making it harder to find the right level. Instead, the ccc would attempt to spur competition by breaking the links between card networks and banks. At present, when a bank issues a credit card every transaction on it is processed by the card network the bank stipulates, meaning the bank is guaranteed the interchange fee the network sets. If the ccc becomes law it will force banks to offer merchants the choice of at least two different card networks. Crucially, these choices could not be the two biggest — at least one smaller network would have to be offered. They could compete for business by offering lower interchange rates, and merchants would presumably jump at the offer.
Two factors help the bill’s chances. It is sponsored by Mr Durbin, the second-most senior Democrat in the Senate, and it is bipartisan, co-sponsored by Roger Marshall, a Republican from Kansas. The ccc’s best chance is probably as an amendment to another bigger piece of legislation, which is how debit-card regulation passed in 2010. Even if the effort fails, or fails to work as intended, a potentially bigger threat to the giants looms. So far new entrants to the payments market have benefited Visa and Mastercard, by making it easier for consumers to use their cards online. But as the new fintechs have gained clout, their decisions about the sorts of payments they offer could influence how much money travels along the card networks. Stripe, a large payments-infrastructure firm, says it is working to provide merchants with payment methods that will lower their costs. Current options include a box for customers to enter card details, but also Klarna, a “buy-now-pay-later” provider through which customers can pay for purchases using bank transfers, thus avoiding the card networks. It could soon include things like FedNow, a real-time bank-transfer system being built by the Fed, which is due to be launched next year. In time, it could even include central-bank digital currencies or cryptocurrencies.
Competitors might make little headway if the perks for sticking with credit cards are sufficiently juicy. But merchants can offer their own incentives. When your correspondent recently went to purchase a pair of linen trousers from Everlane, an online retailer, she was encouraged to pay using Catch, a fintech app. The app linked to her bank account via another payment startup called Plaid. As a thank you for avoiding the card networks, Everlane offered a shop credit worth 5% of the transaction value. Catch has signed up a handful of fashionable, millennial brands including Pacsun, another clothing retailer, and Farmacy, a skincare firm. For evidence that this poses a threat, look no further than Visa’s attempted purchase of Plaid. In 2020 the firm tried to buy the upstart for $5.3bn, only for the deal to be scuppered by antitrust regulators on the grounds that the transaction would have allowed Visa to eliminate a competitive threat. Ultimately, Visa gave up, but the attempt was nonetheless telling. The house of cards carefully constructed by the two payment giants is formidable and long-standing. But it is not indestructible.
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