A Forbes story suggests that Senator Durbin is now looking to do for credit cards what he did for debit cards. The article cites a view from the Innovative Payments Association:
Sen. Dick Durbin (D-IL) is working on legislation that would apply similar limitations on credit interchange as the Durbin Amendment has applied to debit interchange. Specifics and timelines are unclear at this point, but indications are coming from the Hill that the legislation could focus on routing and potentially prohibit network exclusivity for credit routing.
A problem with the price controls is that consumers rarely see the benefit. A long-respected study in Australia supports that, and here is a review by the Federal Reserve. The Fed indicates:
- The results suggest that the regulation has had limited and unequal effects on merchants.
- While issuers have lost billions in revenue, the costs of accepting debit cards have not gone down for many merchants in the survey; and for some merchants, the prices have even increased.
- Interpreting the reasons behind these unequal effects is not straightforward—nor is the regulation’s overall impact on end-users (merchants and consumers)
Talk about bad timing. Just as the U.S. (and every other jurisdiction) are boxing their way around a stressed economy, at a time when inflation is looming, and interest rates look like they are on the way up, here comes an idea to change the pricing model. To counter the potential revenue loss, there will likely be three immediate issues:
- Credit card issuers will need to tighten up credit. This action will mean that programs to bring in thin and marginal credit card accounts will need to tighten- a loss for financial inclusion and a challenge for customers with weak credit files. It will also mean that issuers will have to re-consider the $4 trillion in open credit lines compared to the $1 trillion revolving today.
- Credit card benefits, such as reward programs, will need to be reviewed. Program giveaways like introductory incentives will unravel and further commoditize the credit card industry. In addition, cost-saving remedies will likely shorten call center activity for both customer service and collections.
- Fee structures will need an overhaul. Current features such as free replacement cards, immediate service, and call center span of control will likely suffer.
Bringing in cost controls might be a popular view for legislators seeking re-election; however, the long-term impact will bring tighter credit, fewer features, and a lending product targeted for the up-market.
Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
