In this exclusive interview for The Paypers, Austen Jensen, Senior VP, RILA, elaborates on the US interchange fees space and key regulatory initiatives, providing insights into how merchants can get ready for the new schedule expected to go into effect in 2022
How do card networks set their fees, and what can you tell us about the current context surrounding the interchange fees in the US?
Let’s start with a high-level focus on what we see at the Federal Reserve System (Fed), the Federal Trade Commission (FTC), and the United States Department of Justice (DOJ). We have been able to bring a few reforms under the Durbin Amendment, but that was a decade ago, as it was implemented in October 2011. And those set an interchange ceiling, essentially for large issuers over USD 10 billion. However, community banks and credit unions could still charge what they wanted to charge, and there is also the routing component.
On the other side, the credit card space is very much like the Wild West. There are no reforms there, nothing similar to what the EU or Australia have done. Interchange is still widely unchecked, and there is no routing competition, either. And so, in this sense, the US is the last foothold for the dominant networks.
Over the past few years, we have seen that regulators have started to initiate investigations. We had the Visa investigation initiated by the FTC, which was in October 2019, but it got a little delayed because of COVID-19. Then we saw the DOJ roll out the first investigation of 2021 on Visa as well. Both of these were in that debit lane for their anti-competitive practices, particularly when it comes to routing and their partnership with large issuing banks. Then recently, in May 2021, the Fed issued their updated clarification on debit routing in the card-not-present (CNP) space, and the merchant community members – of which some of the largest retailers in the US are also RILA members – are now writing their comment letters on how we expect the Fed to step in. This has been a number one priority for us over the past several years because, as we have certainly seen during COVID-19 but also before, the growth of CNP transactions has only accelerated year-over-year and was ‘put on steroids’ throughout COVID-19, with several stores closing and shutdowns rippling across the US.
The networks set these interchange fees in partnership with the large issuing banks, and usually, there is no opportunity throughout the process for merchants to voice their opinion. But in 2020, when Visa and Mastercard had set to raise interchange rates, they put a pause on it for 12 months because of the political pressure and the merchant community saying that such a move wouldn’t be feasible, as a wide array of merchants were already getting closed up through no fault of their own. Then, as we were slowly starting to re-open in this early spring, they were going to go ahead with it again. There was pressure from members of the Congress and there was also the voice of the retail industry, which weighted heavily, so they caved to that pressure. This is the only time I have ever seen them back down – so, it took a global pandemic for Visa and Mastercard to change their mind. However, we expect another attempt to raise rates in April 2022.
As Visa and Mastercard aim to roll out this new interchange fee schedule in 2022, what is the strategy behind increasing interchange fees for some US retailers, but not all, in your opinion?
After seeing some of the details of what was going to occur this past April, we noticed that they were going to where high growth was registered. We saw a lot of CNP growth in the past months, and that is one of the areas where they aimed to increase fees. We also expect an increase in the grocery vertical. On the other hand, the fees are expected to be decreased in some other areas – probably because they didn’t see as much of the transaction volume there – but the business decision of going into the verticals that registered the highest growth is the most noticeable. Retailers – even RILA members, who are in the top 100 largest retailers in the US and some of them internationally – do not have the power to negotiate with them around these issues.
What is your take on the interchange fees charged in the US compared to other regions, such as Europe, where these fees are significantly lower?
Policymakers are actually starting to ask questions on this now, particularly around Capitol Hill, at the FTC, and the DOJ – which also have the ability to bring some reform. Additionally, we have been encouraging the Fed to update the Durbin Amendment to reflect the actual issuer costs, since in the debit space we think that the regulators have the power to make a change. But the key regulators in the US are just moving quite slowly and they do not react as the EU does.
In the credit card space, our hope is to see some legislation that could help the industry by allowing for a more competitive environment, and it would also be beneficial if regulators would start to see Visa and Mastercard through a different lens than the one through which they have historically viewed them and their dominance over the payments space. We hope that we will be able to inject some competition and bring some reform in this space, so we could be on par with our peer nations across the globe, where Visa and Mastercard operate. North America is, in a way, the last foothold for them, the one nation where they can still raise rates whenever they want – and this helps them offset some of the loss they faced in other regions.
What do you believe would be the best course of action that the US regulatory bodies could take in this direction? Are there any initiatives underway that would benefit retailers?
The first one that we have seen is the clarification around the notice of proposed rulemaking for the debit card routing. The issuing banks are not honouring the routing provision that allows for the debit and global networks to operate to be enabled on debit cards for CNP transactions. So, our hope is that in the coming months the Fed will clarify this, and our routing rights will be honoured in the CNP space. Besides, on the debit side, the Fed can step in and set a true and accurate interchange rate for banks over USD 10 billion. All the studies from the past decade have shown that – due to innovation both in the payment system space and at the largest banks that handle these card portfolios – issuer costs have declined from roughly 11 cents down to 3 cents over a decade's time, but they are still allowed to charge 21 cents. Therefore, it is time for the Fed to step in and lower that from 21 cents, plus a few basis points for fraud, to reflect the true costs.
On the credit side, my guess is that we could see some competitive reforms in the routing space, which would allow the PIN debit networks in the US to run counter to the global networks of Visa and Mastercard.
How can merchants prepare themselves for when card networks’ new interchange fees will go into effect?
We saw what they disclosed to retailers when they wished to increase the fees this past April. I imagine there will still be some modifications based upon certain verticals, growth, transaction types, but based on what we saw in April 2021, I think the merchants’ community will certainly be working with all their partners to be able to shore up where they can and cut costs to ensure that prices are not being raised.
Considering these inflationary measures and the fact that the simple cost of doing business is increasing, it is very difficult to hold out in our industry, where we are so price point competitive – there is no other industry in the US where you can just pick up your phone and look at your competitors on price like you can in the merchant community. So, we will find creative ways to stay relevant, but this context harms the most those who are at the lower end of the economic spectrum because those are the individuals who are cash-heavy, underbanked – those are the ones who are the most affected by these interchange fee increases, particularly as individuals use credit cards and rewards points.
It is going to be a balancing act. At the very least, we were able to get a glimpse of what the card networks were thinking in April 2021, and some of the RILA members can start to prepare for what is coming. But nonetheless, the economy is still rebounding from the worst recession we have seen in decades – I would hope that the card networks would realise that.
About Austen Jensen
Austen Jensen joined the Retail Industry Leaders Association (RILA) in January 2016 and serves as senior vice president for government affairs. In this role, Jensen advocates before Congress and prudential regulators to promote transparency, innovation, and competition in the payment ecosystem. In addition to handling the payments portfolio for RILA members, he also handles financial services issues that fall under the jurisdiction of the Securities and Exchange Commission, Consumer Financial Protection Bureau, Federal Trade Commission, and the Federal Reserve.
About RILA
The Retail Industry Leaders Association (RILA) is the US trade association for leading retailers. RILA partners with leading retailers to meet the challenges of a dynamic economy. Through collaboration and thought leadership, we advance ideas that foster free markets, competition, economic growth, and sustainability.
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