A Senate Letter Ratchets up the Heat on Networks over Interchange

A bipartisan letter last week from four U.S. senators to Visa Inc. and MasterCard Inc. demanding information about how they set interchange rates is ratcheting up the pressure on the card networks, and it could represent another step on the U.S. road to joining about 20 other countries that either regulate or are seriously considering controls on payment card merchant pricing. To some observers, this increased scrutiny is no surprise given the growing share of consumer payments made on plastic and the loud protests from merchants about the costs of payment card acceptance, especially credit and signature-based debit cards. Merchants already have challenged and continue to challenge interchange in court. “Those fees are going to get ever more attention,” says Stuart E. Weiner, vice president and director of the Payments System Research unit at the Federal Reserve Bank of Kansas City. Besides the actual costs, one of the merchants' chief complaints is that the networks' interchange-setting process is largely a secret and one into which they have little input. The letter from Sens. Richard Durbin, D-Ill., Herb Kohl, D-Wis., Arlen Specter, R-Pa., and Olympia J. Snowe, R-Maine, asks the chief executives of MasterCard and Visa for details about what goes into their interchange rates. The senators say they want answers by June 3. In an e-mail, a MasterCard spokesperson told Digital Transactions News that, “all I can say is that we have received it, and will reply to it.” Visa did not respond to calls for comment by Friday morning. Durbin is drafting an interchange bill (Digital Transactions News, May 13), while the House of Representatives is considering a bill called the Credit Card Fair Fee Act of 2008 that would establish a panel of judges to set pricing if merchants and the card networks couldn't agree on rates. The bill has bi-partisan sponsorship, though bank lobbyists predict it won't pass. Weiner refuses to comment about that bill or the senators' letter, saying the Kansas City Fed's job is to gather information and stay out of politics. But he notes that he's not surprised about the focus on interchange given cards' rising popularity among consumers and the peculiarities of how interchange works. The bank card networks set the rates, which are paid by the merchant acquirer to the issuer of the card used in a given transaction. That process is different from “standard textbook economics,” Weiner says. “It's a different kind of animal.” And interchange in the U.S. is higher than it is in most countries, he adds. In an April report, the Kansas City Fed summarized actions or proposals in a number of countries and the European Union that affect interchange or merchant discount rates. Eighteen countries have imposed price limits, regulations, or taken action of some sort, some dating back to the early 1990s but most since 2000. The European Commission reached agreement with Visa in 2002 to reduce interchange on cross-border transactions by the end of 2007 and in December ruled MasterCard's interchange fees were illegal. MasterCard is appealing. Authorities in another six countries are investigating card pricing. The report can be downloaded from www.kc.frb.org/home/subwebs.cfm?subweb=9.