Strategies: The Merchants’ Impossible Dream?

Jim Daly

Could Congress be convinced to impose Durbin-style price caps on credit card interchange, the way it did with debit cards? Many regard such a scenario as a near impossibility, but hope springs eternal.

Unless they’re public-sector contractors, retailers and other business people usually say they want government out of their lives. In reality, many business people will take government intervention if such intervention benefits their particular interests.

That’s why some merchants continue to talk about what bankers and payment-network executives consider to be a pipe dream: Price controls on credit card interchange, much like the price cap the Durbin Amendment imposed on debit cards from big banks in 2011.

“Congress should pass a limitation on credit card interchange fees,” says Mitch Goldstone, president and chief executive of ScanMyPhotos.com in Irvine, Calif. “I support this essential effort by Congress.”

Goldstone is no stranger to interchange controversies. He was the lead plaintiff in the massive litigation challenging credit card interchange that currently is in the midst of a highly controversial settlement process. If the settlement announced last July gets final approval, however, the defendants—Visa Inc., MasterCard Inc. and some banks—will pay about $6 billion in damages to card-accepting merchants, and the networks will provide another $1.2 billion worth of temporary cuts in credit card interchange rates.

But even staunch proponents of fee limitations acknowledge that a Durbin-style credit card interchange cap is highly unlikely at the moment. The current political environment is different from what it was in 2009 and 2010. At the time, the normally powerful banking lobby was on the ropes, its public image and political clout badly damaged by the mortgage crises and Wall Street scandals. That environment enabled U.S. Sen. Richard Durbin, the Senate majority whip, to slip his now famous, or as many in the banking industry would say, infamous, debit card amendment into 2010’s massive Dodd-Frank financial-reform law.

Tough Road Ahead

Retailers began arguing years before the Durbin Amendment that U.S. interchange rates were higher than those in other countries and that credit card issuers’ interchange income was paying for rewards programs and other items beyond the basic expenses it originally covered. They decried the proliferation of high-interchange rewards cards from issuers, increasingly complex interchange schedules from the card networks, and nebulous pricing plans from many merchant acquirers. All of that, according to retailer partisans, made it hard for merchants, especially small ones, to discern and control their interchange expenses.

The sheer size of credit card payments makes it easy to understand why merchants would welcome more interchange relief. Purchases on U.S. Visa and MasterCard credit cards totaled $1.52 trillion last year. Assuming an average credit card interchange rate of 1.7% of the sale and Durbin-like controls applicable to all issuers that cut the average rate by 50%, merchants could save almost $13 billion. That would be far more than the estimated $8 billion or so Durbin cut from debit interchange.

Such savings are unlikely to be realized soon. After laying low after the Dodd-Frank Act passed in 2010, bankers have regained some of their political muscle, if not the love of the public. Their opponents acknowledge they probably could block new attempts at interchange controls.

“Passing any free-standing consumer-protection law, including a Durbin Amendment for credit cards, would be much harder than passing the previous Durbin Amendment as part of a comprehensive Wall Street reform law,” Ed Mierzwinski, consumer program director of Washington, D.C.-based U.S. PIRG, the national organization of state public-interest research groups that advocate for consumer-friendly laws and regulations, says by e-mail.

Trish Wexler, spokesperson for the Electronic Payments Coalition, a Washington-based lobbying group that speaks on behalf of card networks and banks in favor of the pre-Durbin interchange regime, rates the likelihood of credit interchange controls at “zero.”

“I would say with utter confidence that despite what the retailers say they want to have happen … that there is no appetite on Capitol Hill for a Durbin part deux. It’s just not going to happen,” she says.

Wexler cites three reasons for what she sees as Washington’s post-Durbin interchange aversion: the amendment’s track record since the price controls took effect Oct. 1, 2011; the credit card litigation settlement, and the unsavory prospect of once again getting into the middle of a bank-retailer fight.

“If you ask members of Congress if they think the Durbin Amendment was a success, you’d be hard-pressed to find any member to agree with that,” she says. “Consumers are not seeing any savings from the Durbin Amendment, which is part of what it was said to do.”

She adds that many banks covered by the price controls, those with more than $10 billion in assets, raised account fees or cut free checking and debit card perks in order to compensate for Durbin’s multi-billion-dollar revenue hit. (The Federal Reserve, charged with implementing the amendment, imposed a per-transaction price cap of 21 cents plus 0.05% of the sale and another penny for fraud control, which amounted to about a 50% cut in regulated issuers’ interchange income.)

On her second point, Wexler says the pending interchange settlement addresses many of the retailers’ concerns. And on her third, she says: “Congress never wanted to get involved in this in the first place. They had to pick between friends.”

‘Ugly Choice’

Mary Weaver Bennett, director of government and industry relations for the Washington-based Electronic Transactions Association, the national merchant-acquirer trade group, agrees with Wexler on that final point.

“In my travels, I see interchange fatigue,” Bennett says. “It’s an ugly choice. They [Congress] don’t want to make a fight between two business interests.”

Under the bank card interchange model, the card network sets interchange rates, with the per-transaction fees paid by the merchant acquirer to the card issuer. Acquirers, not surprisingly, pass their interchange costs on to their merchant customers.

Although probably within the scope of its powers, Bennett also rates the possibility of Congress modifying or overturning the pending credit card settlement as very unlikely.

The ETA took a stand against the Durbin Amendment as an unwarranted intrusion by Congress into a business dispute, but some individual acquirers have exploited the possibilities it created. Heartland Payment Systems Inc., for example, launched its “Durbin Dollars” marketing program to inform merchants how much they could save in debit card acceptance costs by processing through Heartland, which promised to immediately pass on its lowered debit interchange expenses to them.

Proponents of credit card interchange regulation see their cause as a long-term, even epic fight. Merchants don’t rule out the possibility that the planets once again could align in their favor, even though the current Congress has given no sign it intends to revisit the interchange issue—especially with Republicans controlling the House of Representatives.

“It’s too early to say,” says Mallory Duncan, senior vice president and general counsel of the Washington-based National Retail Federation. “We’ve talked to a number of members of the House and the Senate, both Democrats and Republicans. The number we’ve talked to recognize that there’s a real problem here. I don’t know too many places where you don’t know what a service is going to cost until you see the statement at the end of the month.”

In contrast to the ETA, Duncan sees a role for Congress even if U.S. District Judge John Gleeson, who is overseeing the credit card litigation from the federal court in Brooklyn, N.Y., gives final approval to the settlement. Numerous individual merchants and trade groups have protested the settlement, which Duncan calls “ill-considered,” saying it would give the card networks impunity from future merchant interchange challenges and leave the conflict smoldering.

‘Back to Congress’

A final decision from Gleeson is expected this year. In giving preliminary approval to the settlement in November, Gleeson said final approval requires a higher standard and he promised to hear out the dissenting merchants’ arguments.

“The banks are trying to take the courts off the table” with the settlement, says Duncan. “But if the banks are successful in taking the courts out of the process, this takes it back to Congress.”

ScanMyPhotos.com’s Goldstone hopes either Sen. Durbin or especially newly elected Sen. Elizabeth Warren, D-Mass., a former Harvard Law School professor and architect of the federal Consumer Financial Protection Bureau, will make a move on credit card interchange. Warren is reviled by many Republicans and financial executives, but she commands considerable respect in Democratic and liberal circles.

“I am expecting Elizabeth Warren to be the catalyst that makes it all happen,” says Goldstone. “I am expecting Elizabeth Warren will be the merchants’ and consumers’ greatest advocate and the worst fear for Wall Street.”

A Warren spokesperson declined to comment.

The fact that interchange is still steaming as a legal and political issue means banks, merchants and networks will be talking about it, often heatedly, for the foreseeable future.  Congress didn’t bite when nine retail trade groups brought their beefs about the proposed settlement to it last September, but that doesn’t mean lawmakers won’t pay attention to interchange later.

“It’s an interesting parlor game to speculate what people might do,” says the ETA’s Bennett.

—With additional reporting by Karen Epper Hoffman