New Merchant Group Forms to Win Regulatory Relief on Interchange

A Washington, D.C.-based organization formed early this year by retail-industry trade groups says it is beginning to work out a plan of attack that it hopes will lead to regulation of the fees card-accepting merchants pay issuing banks. After years of friction between banks and merchants over the subject, this appears to be the first organized effort by retailers to gain regulatory relief on interchange costs. The Merchants Payments Coalition, which counts 13 trade groups among its members, including the Food Marketing Institute and the National Retail Federation, argues the Federal Reserve Board has the authority to control interchange, and is encouraged the Fed has begun to take a more active interest in the subject. The Federal Reserve Bank of Kansas City is sponsoring a conference on the subject in Santa Fe, N.M., later this week that is expected to draw high-level central bankers from around the world. “We hope the Fed is doing that as a serious examination of what's going on,” says Craig Shearman, vice president of public relations for the NRF and spokesman for the coalition. “We're expecting this to be a brainstorming session that will lead to action. We'd like to see the Fed take some sort of regulatory action that limits the interchange that can be charged [by card-issuing banks].” The coalition is also looking at cases abroad, particularly in Australia, the European Union, and the United Kingdom, in an effort to formulate proposals it can take to regulators. Australia adopted restrictions last year on interchange, while the EU is in the process of doing so and the U.K. is looking into the issue. “We're looking to see what they're doing,” Shearman says. “Some of it may be applicable in this country, some may not.” Although the new organization is still in the early stages of research and has not drafted a timetable for its activities, it hopes to see some sort of result by the end of the year. Beyond the question of interchange, which is set by Visa U.S.A. and MasterCard International and passed on to merchants as part of the discount fees acquiring banks charge merchants, the new group is also concerned about discount fees set by American Express Co. and Discover Financial Services Inc., Shearman says. While credit and debit card acceptance costs have long drawn complaints from retailers, Shearman says interchange in particular accounts for the bulk of acceptance costs. “It seems the increases have come more rapidly, and there have been larger increases the past few years,” he says. The latest round of changes by the bank card networks took effect April 1, and featured increases in certain categories. At the same time, the networks have introduced reductions in other segments, such as e-commerce, where they are trying to encourage activity (Digital Transactions News, March 18). Overall changes in interchange are notoriously difficult to pin down in part because of the recent proliferation of interchange categories, but the coalition points to a report from investment bank Morgan Stanley that pegs the weighted average interchange rate at 1.75% in 2004, up from 1.58% in 1998. The report estimated total interchange costs at $17.4 billion, up 85% since 1998. Shearman says coalition researchers estimate the cost is $25 billion, with merchants belonging to the coaltions' trade groups paying about one-fourth of that. The increase “doesn't seem to be justified by bank costs,” Shearman says. “It's coming out of our pockets and consumers' pockets and we don't see a benefit in return for that.” According to the coalition, the Fed has regulatory authority over interchange because of the pricing structure's tendency to cloud the central bank's picture of the money supply. Whereas cash and checks flow straight from consumers to retailers, Shearman says, debit card payments may reimburse merchants at 98% of value, with the balance passing to banks in interchange. “We tend to think that goes into bank profits,” he adds. Formed at the start of the year specifically to address the question of acceptance costs, the Merchants Payments Coalition draws its membership from trade groups representing general merchants, restaurants, supermarkets, pharmacies, convenience stores, gas stations, online merchants, “and other businesses that accept credit and debit cards and are concerned about the increasing interchange fees charged by banks and credit card companies,” a release the group sent out today says. Shearman will not give details about the group's operating budget, but says it has begun raising money and will probably share office space with the NRF, which is based in Washington, D.C. Although members so far have been merchant trade groups, individual membership by specific retailers isn't out of the question, he says.