Past is Prologue:
There are currently no major co-brand (i.e., partnership between a payment network, financial institution, and a merchant) debit rewards cards in the U.S. The routing mandates of the original Durbin Amendment eviscerated the economics of co-brand cards by mandating a second network on each card. The complete absence of debit co-brand rewards cards between merchants, financial institutions, and networks should speak volumes to what would happen to the credit market. If this legislation is passed, more than $63 billion in consumer credit rewards will be in jeopardy.
The payment volume that runs through every credit card dictates the costs, rewards, and features to the consumer. Some premium cards demand significant card volume to redeem a suite of benefits. The vast majority of Americans, however, can access a credit card without an annual fee and redeem $167 in rewards per person on average, according to the Consumer Financial Protection Bureau. A routing mandate upends volume assurances because the network and the financial institution no longer have any certainty on volume. This lack of certainty affects the cost to the consumer and the rewards and features they receive.
Regulated v. Unregulated:
If the Credit Card Competition Act passes, why would any merchant partner with a regulated network (i.e., Mastercard and Visa) when they could partner with an unregulated network? Finally, some financial institutions with assets less $100 billion participate in co-brand programs now, which are in jeopardy if this legislation passes.
Routing Mandates are Backdoor Price Controls:
The “second” network is desired on credit because it directly reduces interchange without imposing a specific cap. Under the original Durbin Amendment, many small financial institutions saw interchange revenue decline by more than 30% for debit transactions. Small financial institutions stand to lose billions in annual interchange revenue from these proposed mandates. These indirect price controls greatly reduce the collective incentives to create new co-brand cards.
Exemptions Don’t Work:
Today, thanks to the original Durbin Amendment routing mandates, thousands of small financial institutions—supposedly “exempt” from regulation—receive the same debit interchange as the largest financial networks in the U.S. Merchants with market power already have deals with second networks on debit routing. Those will be replicated to credit if the bill passes. For example, credit unions report some large merchants pay only 2 basis points for many debit transactions, even though the regulated rate is roughly 70 basis points. Because the goal of the bill is to impose a backdoor price cap, there will be few incentives and less revenue for financial institutions and payment networks to partner on co-brand cards that provide rewards directly to consumers.