The Federal Reserve and Federal Trade Commission recently proved there is a cop on the beat ensuring that the debit reforms passed by Congress are followed.
Banks and others have focused their attention on the limits to price-fixing that debit reform brought, but reform also called for networks to compete with one another for transactions. Visa, however, didn’t want to compete with the likes of Star, Pulse, NYCE and others.
Instead, with the transition to chip cards as subterfuge, Visa set up technical requirements for new chip card readers that interfered with merchants’ ability to decide which network to use.
Suddenly, when shoppers inserted their new chip debit card into the computerized reader at the checkout counter, they were presented with a screen that said to select either “Visa Debit” or “U.S. Debit.”
If they pushed “Visa,” the transaction went directly to Visa’s network, excluding other companies that might be cheaper or provide more security on the transaction from consideration.
Only if shoppers pushed “U.S. Debit” did the retailer have a choice of which network to use. Of course, “U.S. Debit” isn’t a company and doesn’t exist. It was meaningless to consumers. In fact, most consumers don’t know there are separate networks that can carry transaction information to the banks when cards are used.
So, Visa required a false selection that they knew was rigged. Most shoppers just recognized the name “Visa” and pressed that button – and the competition was over without Visa having to try to match other networks’ prices or card security.
Thankfully, the Fed and the FTC saw that Visa was undercutting the rules on the books and undermining competition. First, the Fed clarified its rules so there could be no doubt that Visa’s rules for programming card readers to take competitive choices away from merchants were illegal. Second, the FTC investigated and pressured Visa to quickly abandon its rules.
The result was a win for the rule of law and a competitive market. While Visa wants to do anything it can to ensure it doesn’t have to compete on price like every other business, the debit reforms passed by Congress say that it does – and now we know that the Fed and the FTC are prepared to enforce the law when Visa refuses to follow it.
Of course, it’s not just that Visa was willing to flout the law to avoid competition. It is also busily lobbying Congress to repeal the law entirely. Its lobbyists helped get a repeal into the Financial Choice Act that went through the House Financial Services Committee in September.
Ironically, that meant a bill predicated on the idea that free market choice should govern financial services actually endorsed price-fixing and payments to block competition. That’s not choice.
Choice is what debit reform put in place. It ensures that there are at least two competitor networks ready to carry transaction information each time a debit card is swiped (or inserted). Just that small change opens Visa’s fixed game into a competitive marketplace.
This is just like the changes that opened up competition in telecommunications. It used to be that everyone had to use AT&T for their phone calls. But the courts and Congress opened things up so that people had choices like Sprint, MCI and more. All of a sudden, calls that had cost us a dollar or more per minute started costing a dime per minute and then pennies. That little wedge of competition has spurred a revolution in pricing and service.
Card networks, in fact, just do what phone companies do. They provide the communications lines – only with cards, the networks send transaction rather than voice data back and forth.
We’ve seen that competition works. It’s the basis of our free enterprise system. Reform brought that competition to debit cards. We should expand it – not let Visa break or repeal it.