LegiStorm

Summary:

The basic structure of a credit payment involves a customer, the customer’s bank (called the issuing bank), a card payment network, the merchant, the merchant’s bank (called the acquiring bank), and possibly additional service providers that facilitate the flow of transaction data. Banks and credit unions issue cards to consumers, and those financial institutions that issue credit cards belong to card networks. Card networks are associations that facilitate payments by connecting the issuing bank and acquiring bank. The four major credit card networks are Visa, Mastercard, American Express, and Discover. The vast majority and dollar value of credit card transactions are processed over these four networks. (There are also a number of smaller networks.) Networks facilitate transactions under a business model referred to as either a “four-party system” or a “three-party system.” Four-party systems consist of the cardholder, the merchant, the acquiring bank, and the issuing bank. In a four-party system, the network connects merchants to issuing banks. Three-party systems consist of the cardholder, the merchant, and the network provider, which serves as both the acquiring and the issuing bank. In a three-party system, the network processes and approves authorization requests. Most merchants want to accept electronic payment cards (as opposed to just cash) due to their popularity among consumers. Further, merchants generally choose to accept cards that can be run on at least one of the most popular networks, such as the four listed above. In order to accept certain cards, the merchant needs to procure the hardware (e.g., a card reader) and software (e.g., payment app), which can be done from the networks, a third-party payment processor, or the merchant’s bank. Merchants can choose which payment processors they want to use for certain payments. Further, the merchant can direct the processor to route different types of payments over different networks. Alternatively, the merchant may choose a service provider that makes these decisions on behalf of the merchant as a function of its pricing scheme. Ultimately, when a payment is made, the processor will send information to the acquiring bank, which will route the transaction over the chosen network to communicate with the issuing bank. Networks and processors facilitate the transfer of funds from the issuing bank to the acquiring bank. For this service, the merchant agrees to pay a fee called the merchant discount rate (MDR) for each transaction. This fee is paid to the merchant’s bank and then split and passed along to the other market participants in the form of interchange fees, assessment fees, and payment processing fees. The MDR is typically around 1%-3% per transaction. Merchant fees have been the subject of much debate in Congress since before the financial crisis of 2008. Debit card interchange practices were first regulated and fees were capped under provisions in the Dodd-Frank Act of 2010 (15 U.S.C. §1693o-2). Policymakers used two tools for regulating debit card interchange in that law: a price cap and transaction routing rules aimed at increasing competition among the four card networks. The debate now focuses on whether and how credit card “swipe fees” should be regulated. Estimates vary, but recent data suggests that in 2022, swipe fees were around $160 billion, with credit card transactions comprising the majority of fees paid. Recent proposals to regulate credit card swipe fees have aimed to lower fees through the routing rules similar to those applied to debit cards since 2010—specifically, removing transaction routing restrictions that create barriers to competition and prohibiting networks from requiring banks to issue cards that would run only on their networks.