A House Antitrust Panel Becomes the Latest Interchange Battlefield

The Capitol Hill spotlight shone again on payment card acceptance costs Thursday when a U.S. House of Representatives antitrust panel held a hearing to investigate interchange. At issue is the question whether the federal government should play any role regarding this most controversial aspect of card pricing. Bank interests are opposed to intervention, but retailers and consumer advocates who say it costs merchants too much to accept cards are warming to the idea that government should at least closely examine the card industry's structure and pricing practices. The task force is part of the House Judiciary Committee. A committee spokesperson told Digital Transaction News before the hearing that the task force's role is to gather facts; no interchange bill is in the hopper at the moment. Visa USA and MasterCard Worldwide set interchange, which the merchant acquirer pays to the issuer of the card used in a transaction and typically passes the cost on to the merchant. Many retailers call this system price fixing, but evidence that it works is shown by Visa and MasterCard reports that 600,000 merchants joined their networks last year, testified former Federal Trade Commission chairman Timothy J. Muris. Muris, who has advised Visa on antitrust law and is a professor at the George Mason University School of Law, said the opinions he expressed Thursday were his own. “The protracted struggle over interchange is simply a fight about whether the federal government should set the rates that merchants pay to accept electronic payments,” he said. For an example showing that interchange price controls don't work for consumers, he pointed to Australia, where the country's central bank cut Visa/MasterCard interchange to 55 basis points (0.55% of the sale) in 2003. “Since the imposition of the rate caps, credit card fees have increased substantially,” he said. “In a recent study of Australia's rate regulation, economists estimated that Australian cardholders had seen their annual fees and finance charges increase by between AU$148 million and AU$197 million. The value of rewards to cardholders on credit cards has fallen by nearly 20%.” Interchange set by the networks helps small banks, which don't have the resources to negotiate separate rates with thousands of merchants, compete with the behemoths, according to John Buhrmaster, president of the 1st National Bank of Scotia in Scotia, N.Y., a town of about 8,000 near Schenectady. Buhrmaster, who was testifying on behalf of the Independent Community Bankers of America trade group, is the fourth generation Buhrmaster to head 1st National, which is both an issuer and an acquirer. “I can tell you with confidence, if I didn't have a card network like Visa or MasterCard standing in for me to negotiate interchange rates against the mega-banks with national footprints, I?and maybe my father before me who served as president?would simply not have been able to compete for as long as we have.” Interchange, however, has become a major expense for supermarkets since card payments took hold in that industry beginning in the early 1990s, said Steven C. Smith, chairman of the Food Marketing Institute, a grocery trade group, and president and chief executive of Abingdon, Va.-based K-VA-T Food Stores Inc., a 95-store regional chain that operates under the Food City banner. Claiming that the FMI's 26,000 stores “have all been put in the position of having to pass along the costs of these credit card interchange fees,” consumers as a result “pay over $4 billion annually in FMI member stores, and because the fees remain hidden, they don't even realize it!” According to consumer advocate Edmund Mierzwinski, consumer program director for the U.S. Public Interest Research Group, credit card interchange cost merchants and consumers $36 billion in 2006. And Mallory Duncan, senior vice president and general counsel of the National Retail Federation and spokesperson for the Merchants Payments Coalition advocacy group, disagreed with Muris about the effects of Australia's interchange cap. He said the cap has lowered merchants' costs while spurring issuers to offer more low-interest-rate and low-fee cards with no rewards, and offer rewards cards that have higher rates and fees. The result, he said, is that issuers have to compete on price. “Indeed, this resulting price competition is precisely the outcome the card systems feared,” he said. Digital Transactions News obtained the quotes for this story from written testimony submitted to the Judiciary Committee before the hearing. Merchants are suing Visa, MasterCard, and some large banks through a pending federal class action in New York and individual retailer lawsuits challenging interchange. Thursday's hearing was just the latest in a round of Congressional inquiries into card pricing, including a Senate interchange hearing a year ago (Digital Transactions News, July 19, 2006). It's unclear, however, whether the change of control in Congress from Republican to Democratic hands in January will result in more regulation of the payment industry, at least on the acceptance side.