By Liz Garner, SVP of Policy & Public Affairs, Merchant Advisory Group
March 2, 2017
While the Financial CHOICE Act does not appear to be as high of a priority for House leadership as healthcare and tax reform initiatives, it is still likely to be considered before the August recess. It is critical that businesses weigh in now with Members of Congress to voice support for keeping debit reforms fully intact.
Last year, House Financial Services Committee Chairman Jeb Hensarling (R-TX) introduced the Financial CHOICE Act with language that would repeal the full text of the Durbin amendment to Dodd-Frank. This includes repeal of the following debit reforms:
- “Reasonable and proportional” limitations on debit interchange pricing for issuers with over $10 Billion in assets who refuse to negotiate rates outside of the price-fixed Visa and MasterCard fee schedule.
- Merchant choice over debit transaction routing services, including the requirement that issuers enable at least two unaffiliated networks on every debit product.
- Merchant protections from card network acceptance rule fees and fines if a merchant wants to 1) discount for debit, cash or checks; 2) set a minimum for credit card use in their store not to exceed $10.
Legislation has not been re-introduced yet this Congress, but the updated legislation will likely still contain the same debit reform repeal language. The CHOICE Act - as the Republican alternative to Dodd-Frank - will likely move this year in a Republican-controlled Congress and Administration.
While the CHOICE Act does not appear to be as high of a priority for House leadership as healthcare and tax reform initiatives, it is still likely to be considered before the August recess. The Administration recently weighed in on Dodd-Frank through the Executive Order (EO) process where President has ordered the Treasury Department within 120 days of the signed EO to report back on burdensome regulations associated with the Dodd-Frank law. This strategy is similar to the Administration’s approach on other key policy issues, and will serve as a parallel track to legislative activity.
The CHOICE Act still has a long road ahead to become law, but House Committee action is almost guaranteed in the first half of the year. Legislation will be re-introduced in late February or early March. The bill will then be marked up quickly in the House Financial Services Committee. Given the base text will not have significant changes from last year, the Chairman may even forego hearings on the bill and move straight to the markup process. Democrats are largely opposed to the Dodd-Frank replacement package so it is unclear what, if any, amendment strategy they may pursue during Committee markup. If Democrats employ the same strategy as last fall where they did not offer any amendments the bill could sail through the markup process. Only one Republican voted against the bill in Committee last year, and while there are several new members on the Committee, few, if any, are likely to vote against their Chairman in the opening months of the Congress.
After Committee markup, the Chairman will likely try to move the bill to the House floor as quickly as possible. The Durbin amendment repeal language is already viewed as one of the most contentious pieces of the bill, and one that could significantly hinder the bill’s progress. As such, there is an opportunity that House leadership could remove the language during the Rules Committee process; otherwise, members of both parties will likely have to take a tough vote on debit reform repeal on the House floor. Assuming repeal language stays in the bill during the Committee process, and is not removed by leadership during the Rules Committee process (where the parameters for floor debate on a bill are decided), there will most likely be an amendment on the House floor to strip Durbin amendment repeal from the CHOICE Act. Still, there is no absolute guarantee that House leadership would allow such a vote to take place.
The Senate is not likely to take up the House bill due to greater likelihood of political opposition to the package in the Senate. The Banking Committee is still trying to determine what their own process will be for Dodd-Frank reform, but Consumer Financial Protection Bureau (CFPB) changes will be their top priority, and it is likely that they will start with their own legislative language instead of directly taking up the CHOICE Act. There is a long path ahead in the Senate, but having repeal language in a House-passed bill leaves debit reforms vulnerable to repeal if both legislative packages move to a conference later in the Congress.
The conference process is where pre-selected members of both the House and Senate meet to reconcile and vote on a legislative package that combines items from both the House and Senate-passed bills. It was through the conference process that the Durbin amendment eventually became law.
How do I plan for this as a business?
There’s a tremendous amount of uncertainty for business in this space – more uncertainty than there has been on debit pricing in over five years. However, as businesses look to budget and manage, it is critical to recognize that any change will not be abrupt. A few things to keep in mind:
- The merchant community and other industries are aggressively fighting back legislative repeal of the Durbin amendment. It is a long, slow slog for any repeal language to become law.
- It is unclear what provisions will become effective immediately should the law change. It took several months for changes to go into effect when the law was passed and it is unclear how quickly the market would respond to a reversal of those changes. Any direct fee structure impacts are unlikely in 2017. The caveat to that is some networks might feel emboldened by the prospect of the law getting repealed and could increase network fees, which are not directly regulated by the law.
- If the law is repealed, debit pricing overall will revert to being totally unpredictable, and will likely rise once or twice a year based on the trajectory debit pricing was on before reforms. Exempt issuers have seen signature debit rise from 44 cents on average in 2009 prior to reforms to 51 cents per transaction in 2015 according to the latest Federal Reserve data.
- Routing competition on debit is a prime example of changes that will not be undone overnight. Unfortunately, the type of competitive subversion Visa employed with the U.S. EMV deployment will be more difficult to keep in check if the law goes away. However, all issuers who have EMV chip debit cards at market, should have at least two unaffiliated networks on the card already, and with the chip technology, that dynamic is not as easy to change as it is with magnetic stripe so network competition on the cards will continue to exist at least until cards are re-issued.
- 2010 Visa and MasterCard agreements with the Department of Justice help protect merchants who want to offer a discount for debit, cash or check, but the protections are not as robust as those in law with the Durbin amendment.
- Any merchant with a $10 or less minimum for credit card purchases will face the threat of a $5,000/day fine if they continue to employ the process presuming the Visa and MasterCard network rules will revert back to pre-2010 language.
- Prior to debit reforms, large financial institutions were steering consumers to more fraud prone signature debit products because of the higher fee income those issuers collected on the transaction. To the degree that some of this inefficient behavior was curbed by debit reforms, it will likely resume being commonplace, and overall U.S. fraud rates will rise. With merchants bearing the majority of e-commerce and mobile fraud losses along with more in counterfeit fraud losses than ever before, the potential increase in U.S. payment card fraud losses is likely to hit merchants harder than ever before.
How can I get involved?
It is critical that businesses weigh in with Members of Congress to voice support for keeping debit reforms fully intact. The time to weigh in is now with a special focus on key leaders in the House Republican party, including Speaker Paul Ryan, Majority Leader Kevin McCarthy, Majority Whip Steve Scalise, and Rules Committee Chairman Pete Sessions. As mentioned above, any repeal language that remains intact during the House legislative process is a threat to the law.
MAG co-hosted a fly-in with several other merchant trades associations in early February where the group met with over sixty key Congressional offices to discuss retaining debit swipe fee reforms. These in-person constituent visits make a huge difference so please consider participation in any upcoming D.C. legislative fly-in events through any of the participating merchant trade associations.