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Payments News Update – October 20, 2023

Posted  October 20, 2023

Legal and Regulatory Developments

SPOTLIGHT: Fed to Propose Lowering Debit-Card Swipe Fees
The Wall Street Journal – October 17, 2023 (subscription required)

The Federal Reserve is preparing a proposal that would lower the fees merchants pay to many banks when consumers shop with debit cards. Today, merchants pay large card issuers 21 cents plus 0.05% of the transaction amount, the level set by the Fed in 2011. The Fed can lower the cap if it determines the costs for processing debit-card payments are declining, but it has never done so.

The Fed on Tuesday said it would hold a meeting next week to vote on a proposal about revising the fee cap, without being more specific. The proposal would lower the cap, according to people familiar with the matter. The Fed would then start a public-comment period that would likely include heavy lobbying from card issuers and merchants and congressional discussion. It would require a final vote by the central bank’s governors to be implemented. . . .

Retail Group Renews Call For Swipe Fee Legislation
Chain Store Age – October 16, 2023

The Merchants Payments Coalition (MPC) is renewing calls for Congress to pass the Credit Card Competition Act (CCCA) to address swipe fees amid record profits from card-issuing banks. The bill, which was reintroduced in June by a bipartisan coalition, is aimed at credit card swipe fees, which average 2.24% of the transaction but can be as high as 4%. MPC says that credit and debit card swipe fees have more than doubled over the past decade and have increased 50 percent since the pandemic alone, hitting a record $160.7 billion in 2022.

According to the group, which represents retailers, supermarkets, convenience stores, online merchants and more, swipe fees are most merchants’ highest operating cost after labor. The swipe fees are impacting merchants while big banks post profit increases. JPMorgan Chase reported that third-quarter net income rose 35% year-over-year (YoY) to $13.2 billion on revenue of $40.7 billion, which was up 21% YoY, while credit and debit card sales rose 8%. Citi recently reported third-quarter net income of $3.5 billion, up 2% YoY, with revenue growing 9% to $20.1 billion. . . .

COMMENTARY: A Dose of Reality on the Broken Credit Card Market
Digital Transactions News – October 13, 2023

Eric Cohen’s Commentary, “Why the Credit Card Competition Act Falls Short,” posted here Oct. 9, makes three key claims about how the Credit Card Competition Act would supposedly harm small businesses and consumers. All of them are wrong. First, he says the bill would allow merchants “to choose their own network” and argues that “the merchant isn’t likely to know which is right for them.” The CCCA does not allow merchants to choose their own network. Instead, it requires the nation’s largest banks to enable at least two unaffiliated networks on each credit card—Visa or Mastercard plus a competitor like NYCE, Star, or Shazam.

The choice of which two networks to enable would be entirely up to the card-issuing bank, not the merchant. Merchants would then get to choose which of the two networks to use, creating competition over fees, service, and security that is expected to save them and their customers $15 billion a year. The same requirements already exist for debit cards, where the merchant part of that choice is usually exercised by merchants’ processors. Exactly the same would happen with credit cards. Small businesses get major advantages from working with their processors today, and that would continue. . . .

Companies Should Be Able to Challenge Old Rules With New Injuries
Bloomberg Law – October 12, 2023 (subscription required)

Must new businesses accept unlawful federal regulations that are older than the company, or may they challenge such regulations in federal court? The US Supreme Court granted certiorari to answer that question in Corner Post v. Board of Governors of the Federal Reserve System, a case that will decide whether a right of action challenging a federal agency rulemaking accrues when the rule is promulgated or when it injures the plaintiff.

The case is important for all regulated entities, and especially for new businesses seeking the same opportunities to challenge agency regulations that were afforded their more established rivals. The certiorari grant may reflect the importance the Supreme Court now places on fidelity to statutory text and the court’s increased scrutiny of administrative power that appears to exceed textual limits. The lower court in this case, following several other lower courts, entered an agency-protective judgment without any attempt to grapple with the pertinent issues of statutory interpretation. . . .

Industry Developments

SPOTLIGHT: Want a Discount? Pay in Cash
The Wall Street Journal – October 14, 2023 (subscription required)

Shoppers once had to fish in their wallets for a coupon to save a few bucks at checkout. These days, a $20 bill often does the trick. Discounts for paying cash are now on the menu at coffee shops, restaurants and other stores as businesses search for ways to skirt rising credit-card transaction fees. The share of all cash purchases that came with a discount climbed 66% between 2015 and 2022, according to research by the Federal Reserve Bank of Atlanta.

But cash isn’t always king, even in the world of high fees. Just as with the expanding range of cards and mobile-payment options shoppers now have to choose from, deciding when and whether to pay cash can be confusing. Lincoln and Jackson can haggle down the price for you in some situations, but for rewards and convenience, plastic often beats dead presidents. . . .

The Clearing House CEO: ‘It’s All About Growing the Real-Time Payments Pie, Not Fighting Over Profits’
PYMNTS – October 16, 2023

Now in his eighth month as CEO of The Clearing House, David Watson noted to PYMNTS CEO Karen Webster that there’s significant promise — and a long road ahead — for real-time payments in the United States. There are two dimensions to consider, he said, in tracking and scoring the readiness and the progress of faster payments. And, if one’s scoring those dimensions on a scale of one to 10, according to Watson. “In terms of the capabilities we can offer, we’re at about a seven. In terms of the takeup, the use and the explosion of those payments, we’re at about a one or two,” he said. “It’s a long journey to change an infrastructure and a settlement model.”

TCH’s real-time payments platform, RTP® Network, has been around for almost six years. The platform reached its 500 million payment milestone, per a July announcement. That same month, the FedNow® Service went live. There are two real-time payment rails in existence, yet to be interoperable — that’s going to be a work in progress — but looking toward the same horizon. . . .

Credit Cards: Surcharges Surge as US Businesses Pass Costs on to Customers
Financial Times – October 14, 2023

American business owners have long chafed at the high cost of accepting credit cards. Complaints over these so-called “swipe fees” have only grown louder since the pandemic. That prompted more shoppers to ditch cash for card or contactless payment methods. Credit card purchase volumes jumped 51 per cent between 2015 and 2021, figures from the Federal Reserve show. Transaction values were up 60 per cent over the period.

Last year, US merchants paid a record $160.70bn in processing fees to accept $10.6tn in card payments, according to the Nilson Report. The bulk of those fees — about 79 per cent — was from credit cards. Many companies’ profits margins are narrowing as they get squeezed by higher inflation. That has prompted a growing number of businesses to attempt to pass higher costs on to their customers. They are adding a surcharge or a convenience fee on those who want to swipe their plastic. . . .

Cash Use Falls as Instant Payments Gain Ground: McKinsey
Payments Dive – October 13, 2023

Worldwide electronic payment transaction volumes rose 17% over the past five years, according to an annual payments report from the global consulting firm McKinsey. But as payment choices evolve, users are migrating to lower-fee instruments, pushing revenue and margins down as scale increases, the report showed. So, the volume increase was much higher than a 6% increase in payments revenue growth over the same period, according to the report, released in September.

Instant payments are growing the fastest in places where there is not just payments infrastructure, but also allow multiple applications, including person-to-person and bill-pay tools, coupled with a digital identity. “When all of those things came together, (it) actually drove such rapid adoption,” McKinsey Partner Philip Bruno, one of the report’s authors, said in an interview.

In the U.S., the Federal Reserve this year launched an instant payments system, called FedNow, that will now compete with the private RTP Network started by large U.S. banks in 2017. With FedNow seeking to engage more financial institutions in real-time payments, the use of instant payments is expected to increase in the U.S. . . .

How Visa and Mastercard Are Fighting Friendly Fraud
American Banker – October 13, 2023  (subscription required)

Friendly fraud — which refers to customers requesting a refund for an otherwise legitimate payment — is getting worse, increasing the danger of financial losses and the risk of security overreach to fight the problem. Officially called first party fraud, this scam has always been a problem, but it has expanded in recent years — particularly during the growth of e-commerce during and after the pandemic, and through the recent bout of high inflation.

“When friendly fraud occurs, the merchant is often left to absorb most of the losses of the dispute, despite providing a legitimate good or service to the consumer,” said Paul Fabara, chief risk officer at Visa. “We’ve seen that these ramifications can include losses that can be up to double the original transaction amount, which can impact merchants’ businesses and their bottom line.”

Visa and Mastercard have updated their dispute policies to address friendly fraud, while trying to avoid adding financial burdens to merchants or issuers, or requiring merchants to add extra vetting. The card networks’ moves may make a difference, but will require updates from merchants and issuers that may take time. . . .

Discover Global Network Launches Cloud-Based Network Tokenization Platform
PYMNTS – October 12, 2023

Discover Global Network, the payments brand of Discover, has launched its new cloud-based network tokenization platform. This platform aims to offer companies a scalable and flexible token solution to enhance the security and efficiency of their payment processes, the company said in a Thursday (Oct. 12) press release. By integrating stored payment tokens as part of the payment experience, merchants and customers can get a seamless and secure transaction process.

The network tokenization platform, an extension of Discover Stored Payment Tokens, is designed to cater to the evolving payment ecosystem, according to the release. Discover partners can now deploy this solution at scale with their merchants. . . .