We’ve all sat through a bad movie or two, but most of us refrain from sitting through the same terrible experience twice.
Unfortunately, that’s exactly what came to mind for this rural Kansas community banker when I learned of a new proposal in Congress to let merchants control how banks process credit card transactions.
The proposal from Sen. Dick Durbin, D-Ill., And our home state Sen. Roger Marshall, R-Kan., Is an unfortunate sequel to a similar bill Sen. Durbin rammed through Congress in 2010 that mandated government intervention in debit card transactions. The Marshall-Durbin bill is a page copied directly out of the Dodd-Frank Act that has already devastated community banking.
It was bad policy then and even worse today for consumers, small businesses and community banks like mine.
Most Kansans don’t think twice when they use their credit card. They appreciate the incredible convenience, security and protection their card provides. Most business owners appreciate the savings and benefits they receive by having customer payments processed with a tap of a card.
Of course, that seamless process comes at a cost to the card-issuing banks and the payment networks, so they charge the merchant a small fee each time their customer’s card is used – money that helps pay for security upgrades, fraud protection for customers and popular reward programs so many Kansans enjoy.
Big box retailers and eCommerce giants don’t like paying those fees, so they have convinced Sens. Marshall and Durbin to introduce this bill that effectively brings the government into the middle of a private, commercial transaction. They want to pay less and pocket the profits.
The problem is their potential windfall would produce real pain for consumers, small businesses and community banks like mine trying to meet the needs of our customers.
Kansas consumers will see their popular credit card rewards programs scaled back or end. Even if their issuer offers rewards, there’s no guarantee merchants will pick a network that credits them for their eligible benefits. More troubling, Kansans will not know if the merchant is relying on a payment network that skimps on security and compromises their data.
Under the current system, the issuer and the network have a clear incentive to keep customers protected. If this ever becomes law, Kansans can also start tossing away their perfectly good credit cards. This legislation would make most cards obsolete. What is the point of Kansans picking the card they want if the government can effectively replace it?
Small businesses would also feel the pain. They will need to learn how to implement multiple payment options for each transaction as required by the government and train management and staff on the multiple new systems. They will need to explain to customers why they didn’t get the right reward points from their transactions or why their rewards programs went away altogether.
If they use a cheaper, less secure network, then small businesses will also have to explain to customers how their personal information was leaked. That won’t be fun.
Just as with Durbin 1.0, Sens. Marshall and Durbin claim their proposal won’t affect little banks like mine. History tells us otherwise.
The original Durbin amendment exempted banks under $ 10 billion. Guess what happened? Community banks and credit unions still suffered a 30% decrease in their interchange revenue because the government was effectively imposing price caps on all debit transactions. This proposal will produce the same results for credit card transactions.
Maybe Sens. Marshall and Durbin could justify their proposal if consumers saw the savings, but again, we have seen this bad movie before. According to the Federal Reserve Bank of Richmond, after the original Durbin Amendment was implemented, 98.8% of merchants failed to pass along savings realized from debit regulation to consumers, and over 20% increased prices.
Clearly, large retailers are excited about this legislation and the potential to pad their profits from this one-sided proposal. However, customers and small businesses will be negatively affected and harmed by this government mandate.
I respect Sen. Marshall, but he is on the wrong side of this issue. I hope we can convince him to drop his support of him for this bill. If we can’t, we will be asking our customers who appreciate the many benefits of their credit card to join us in opposing this proposal and keeping the government out of our business.
Shan Hanes is the president and CEO of Heartland Tri-State Bank in Elkhart and the chair of the Kansas Bankers Association.