Payments News Digest 3 June 2022

US/Canada: Rumours see-saw on possibility of interchange cap on credit cards

It seems that key US lawmaker Senator Dick Durbin, prompted by the latest fee changes from the leading schemes, may be considering a legislative proposal that could, in effect, extend his debit card interchange cap to also embrace credit cards: the scoop comes from Visa chief executive Al Kelly, who told a conference in New York that a draft was currently sitting on the senator's desk. However, a few weeks ago the signs were that the senator was leaning towards reforming practices in this area rather than legislating against them, doubtless aware that the Consumer Financial Protection Bureau (CFPB) has been raising the rhetoric considerably on fees-related issues over the last six months in a bid to reshape the play without rewriting the rules.

The 2011 Durbin Amendment put a ceiling on US debit card interchange rates, but two subsequent studies undertaken by economists at the Fed as well as at a pair of leading universities found that the measure did not succeed in improving consumer wellbeing. Instead, it was argued, the cap's market disequilibrium produced a myriad of knock-on effects. That distortion is now being cited by Republican senators as a reason not to interfere again, which means that Senator Durbin, much as he may wish otherwise, may end up lacking the support necessary to change the law.

Meanwhile, north of the border, Canadian merchants have been told by the representative body CFIB (Canadian Federation of Independent Business) to pass interchange fees on to consumers after the settlement of a class-action suit. Any merchant in the country that accepted Mastercard or Visa payments on a credit card in the 2001-20 period is also entitled to rebates as high as $5,000. The CFIB argues that an interchange surcharge at the point of sale should resolve the underlying issue going forward.

US: DC decisions loom as supply-side struggles and spending behaviours change

In Washington, Jerome Powell (as chair), Lael Brainard (as vice chair), Lisa Cook and Philip Jefferson were all sworn in as governing board members of the Federal Reserve in the closing weeks of May. Few boards will have convened to address such a packed agenda as debate swirls over the Fed's monetary response to rising inflation and supply shocks: has the interest-rate increase been too little too late? Or is it better to boost employment through supporting demand a while longer? The latest official figures show that Americans were still spending in April but with increasing recourse to savings for their consumption, raising the chances of a difficult second half of the year for households. The policy dilemmas are only intensifying as the American central bank tries to balance twin mandates for job growth and price stability that, in ordinary times, are mutually compatible.

On top of policymakers' macroeconomic responsibilities, the wilting of cash usage in the digital era is leading to ideological division over how to write the next chapter in the history of US currency. One side, mindful of the leaps being made by China's ongoing e-CNY pilot, favours a Fed-run CBDC (central bank digital currency) while a group concerned about Fed expansion and privacy ramifications are now pushing a more modest solution: a digital dollar crafted for P2P usability and created by the US Treasury to circulate alongside the existing cash supply from that executive department. Whichever is chosen, the decision has to take into account the rise of blockchain-based assets: with young Americans turning away from cash, Fed Vice-Chair Lael Brainard told a committee of lawmakers this week there is a danger of instability if rising generations go over to crypto and stablecoin in the absence of a programmable fiat option.

Brazil: Rocky times for fintechs, but underlying digitalisation in rude health

As many media outlets have noted, market conditions and the rising cost of funding are leading to job cuts at several high-profile fintechs. That pressure is being felt all the more sharply in Brazil, home to the most thriving financial technology scene in its continent: already a dozen unicorns have emerged from this ferment, supported by a penetration rate of 1.6 mobile phones for each citizen. In a country that has long struggled to reduce its unbanked population, Brazilians are now flocking in the tens of million to digital banking.

The biggest success story has no such worries however: instant payments platform Pix, already responsible for a fifth of transactions, is a central-bank innovation. Only 18 months old, it has proven a win-win for stakeholders, from the most underprivileged to the biggest retail banks: the former find the onboarding process a snap while the latter, on balance, are benefiting too, not least from a dramatically expanded marketplace for their products.

There is an additional pay-off for countries, such as India and Brazil, that have been rolling out P2P platforms for the masses: the research head of the Bank for International Settlements told the Economist recently that Pix, having built up a massive register of real-name users and a technical protocol for data exchange, has done more than three-quarters of the foundational work necessary to get a CBDC off the ground.

Other stories of interest this week...

Global: Mastercard focuses on SE Asia, LatAm after India ban, Russia exit
Global: Worldline establishes metaverse showroom
US: Affirm partners with Stripe to expand BNPL offering
US: Amazon opens its first physical clothing store

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