Durbin Spars With Visa And MasterCard

Depending on your point of view, Sen. Richard Durbin, D-Ill., became either a hero or a villain in the payments business back in 2010 with his Durbin Amendment to the Dodd-Frank Act. Among other things, the amendment capped debit card interchange for large issuers, pleasing merchants and ruffling the feathers of the nation’s megabanks.

Lately, Durbin has turned his attention to some seemingly obscure network fees, decrying their potential impact on small banks and credit unions. In June, Visa Inc. announced it had backed off on one such fee shortly before Durbin fired off a letter of protest to Visa chief executive Charles Scharf. Just days later, Durbin followed up by denouncing a MasterCard fee in a sharply worded missive to chief executive Ajay Banga.

Visa’s Delayed De-Conversion Assessment, which the network apparently put into effect only in April, sought to discourage issuers from moving their card branding to MasterCard or other networks and to compensate for Visa volume an issuer may have lost through attrition.

The fee came to 5 basis points on an issuer’s Visa payment volume, according to the letter Durbin sent to Scharf. Observers say the fee may have been prompted at least in part by a strategy at Visa to protect itself from moves by major issuers to defect to another network.

One recent such example is that of JPMorgan Chase & Co. While the banking titan moved its branding to Visa from MasterCard, rather than the other way around, it nonetheless demonstrated big banks were willing to undertake such a switch if they perceived sufficient advantage.

Whether the senator’s pressure got Visa to drop the fee is an open question. Durbin staffers met with Visa executives on May 17 to express Durbin’s objections. That was more than two weeks before Durbin fired off his letter and Visa announced it had changed its mind.

But Durbin wasn’t done. Only two days after writing to Scharf, he asked MasterCard to explain an obscure fee with a clunky name that the senator believes penalizes MasterCard issuers when merchants exercise their transaction-routing rights under the Durbin Amendment with MasterCard debit card purchases.

But MasterCard says issuers benefit whenever its cards are used, and the fee, known as the Domestic Other Non-MasterCard Processed Purchase Volume Fee, “has no impact” on merchants’ routing choices.

The fee is not new, but MasterCard recently indicated it would be increased to 3 basis points.

“This fee … apparently assesses a charge of 3 basis points when a purchase initiated with a MasterCard-branded card is transacted over another card network that is also enabled on the card,” Durbin’s letter says. “Similar to Visa’s fee, this MasterCard fee appears to impose a significant penalty on card issuers that try to shift business from MasterCard to a competing card network or that see their business shifted to competing networks through market forces or through merchant routing choice.”

Durbin did not specifically mention it in his letter, but his amendment to Dodd-Frank requires that debit card issuers give merchants routing choices of unaffiliated networks with each debit transaction.

The typical issuer solution under the Federal Reserve’s so-called Regulation II, which implements the amendment, is to offer access to either the Visa or MasterCard network for signature debit transactions, and an unaffiliated debit network for PIN debit. Durbin’s intent was to stimulate network competition and potentially lower merchants’ card-acceptance costs.

If Durbin’s description is correct, MasterCard is charging issuers when merchants, or merchant acquirers acting on their behalf, exercise the routing rights afforded them under the Durbin Amendment, thus diverting transactions from MasterCard’s network.

“This raises troubling questions about the fee’s impact on network competition and the burdens the fee creates for small banks and credit unions as well as merchants and consumers,” the senator’s letter says. “I am interested to know more about MasterCard’s fee and whether MasterCard intends to make any changes with respect to this fee.”

MasterCard, in a statement, said it is reviewing the letter.

“It’s important to clarify the item in question,” the statement says. “It’s a program we’ve had in place with card issuers that helps ensure we provide our cardholders with the value and benefits of their MasterCard card, even when we don’t process the transaction. This has no impact on merchants’ choice on how they route a transaction.”

Durbin’s letter asks Banga several questions about the fee, including whether issuers can negotiate or contest it, and how MasterCard will ensure that issuers do not interfere with “competitive choices on debit transactions.” He also asks, in light of Visa’s recent fee cancellation, if MasterCard is “considering changing or canceling the Domestic Other Non-MasterCard Processed Purchase Volume fee.”