Election Day: Sandboxes, Durbin rule and skilled tech workers all on the ballot

A wide range of Republican priorities that affect the payment, retail and fintech industries could stall or entirely flame out if Democrats make substantial gains in Tuesday’s midterm elections.

As of midday Tuesday, FiveThirtyEight.com predicted the most likely outcome is a split Congress, with Democrats controlling the House and Republicans maintaining control of the Senate.

That’s enough to throw a major wrench in the Republican agenda, particularly since the party has not made a lot of progress over the past two years on fintech-related issues with its control of the White House and both chambers of Congress.

Dania Maxwell/Bloomberg

For retailers and card-issuing banks, Sen. Richard Durbin, D., Ill., is one of the most important figures in Tuesday’s election, even though Durbin’s seat isn’t up until 2020. The most notable law that affects the payments industry is the Durbin amendment to the Dodd-Frank law that passed in the wake of the 2008 financial crisis.

Republicans have long wanted to repeal the Durbin amendment, which cut the fees merchants pay banks for debit card payments. Financial institutions lobbied for repeal, saying the fee savings weren’t being passed on to consumers. Retailers argued the price caps helped small businesses, and Durbin’s debit card routing rules promoted competition and diluted Visa and Mastercard’s power over the debit card market.

But the Durbin repeal effort was dropped, at least temporarily, in 2017 partly because the lobbying power of merchants and banks cancelled each other out. But the battle over Durbin has continued, with the bank lobby hinting a repeal may come back.

If Democrats control one or both chambers of Congress, there’s likely little chance a serious run at repealing Durbin would be revisited until after the 2020 elections, if ever.

“Durbin is the crown jewel for the retailers, and a Democratic Congress would certainly protect it,” said Richard Crone, a payments consultant, adding that in payments policy, the retail industry tends to lean Democratic while the banking industry leans Republican.

There are several fintech issues that would also stall or fade in a split government. While the Trump administration has made several promises during the campaign and after the inauguration — such as threatening China, cutting off remittances to Mexico to pressure the Mexican government to pay for a border wall, and calling for sanctions on Iran in a way that prompted a German politician to call for a new payments market — most of these pledges have been more rhetorical pressure than actual policy.

But there is more of an immediate impact on skilled worker regulation and technology sandboxes.

Trump has targeted H-1B visas, a type of visa designed to grant residency for a variety of skilled workers, but normally covers foreign technology workers. The Trump administration contends these visas hurt U.S. wages, and its stance has caused freelance payment companies to boost their technology in anticipation of more contract work outside the U.S. if full-time foreign fintech work in the U.S. declines.

If Democrats control one or both branches of Congress, there's a greater chance these skilled worker visas would be protected. "The skilled tech worker visa is the lifeblood of fintech innovation," Crone said.

The Republican leadership has pushed fintech innovation by championing a "sandbox" structure, which waives regulations temporarily for technology developers to test new ideas. It's been successful in the U.K.'s fintech market, but could face opposition from Democrats in the U.S., according to Crone.

The potential of PSD2-style fintech/bank data sharing regulations to pass in the U.S. could also become more partisan, though subject to the gridlock of split government.

"Among policy wonks, the left generally favors the more prescriptive EU approach, like PSD2, and the right is generally suspicious of the state mandating risk management systems, open and and free payments APIs, etc.," said Eric Grover, a principal at Intrepid Ventures.

If the Democrats capture the House there will be legislative gridlock for financial services, according to Grover.

"Maxine Waters as chair of the House Financial Services Committee would be a sea change from Jeb Hensarling — and set the committee on a very different path than Patrick McHenry or Blaine Luetkemeyer, one of whom would likely replace Hensarling if the GOP retains its majority," Grover said. Waters "would use her bully pulpit to criticize and try to impede loosening the regulatory reins. If the GOP holds the House it's not likely it will have a working majority so we would likely have legislative gridlock terms of affecting any meaningful reforms."