Interchange Bill Raises Questions About Role of Government

A bill introduced in the U.S. House of Representatives late last week that proposes to lay down new rules for how payment card interchange would be set raises many questions beyond whether the banking or retail lobby carries more clout in Congress. The questions can be summed up in one: what should be the role of government, if any, be in setting interchange rates? Retailer proponents of the Credit Card Fair Fee Act of 2008 call the bill a way to let the free market work, but opponents, largely bankers and their allies, say the bill is nothing more than an effort by government to set prices. Introduced by House Judiciary Committee chairman John Conyers Jr., D-Mich., and committee member U.S. Rep. Christopher B. Cannon, R-Utah, the bill has a dozen other cosponsors from both sides of the aisle, an indication that merchants have struck a chord in Congress as they try to cast interchange as something that raises prices for consumer goods and services. Set by the bank card networks, interchange is a fee representing a piece of a bank card transaction. It's paid by merchant acquirers to card issuers and typically passed on to merchants. Conyers says interchange totaled $42 billion last year. The bill, H.R. 5546, would “give merchants a seat at the table in the determination of these fees,” Conyers said in a statement. “It is not an attempt at regulating the industry and does not mandate any particular outcome. This legislation simply enhances competition by allowing merchants to negotiate with the dominant banks for the terms and rates of the fees.” These negotiated rates would have limited protection from challenges on anti-trust grounds. If a merchant and payment network couldn't reach an agreement, a three-member panel of “electronic payment-system judges” appointed by the U.S. Department of Justice's anti-trust division and the Federal Trade Commission would have authority to impose binding rates and terms for three years using the standard of a “hypothetical perfectly competitive marketplace,” according to a bill summary. No other fees or conditions could be imposed on the merchants. The chief judge would have authority to hire three staff members, effectively creating a mini federal bureaucracy to oversee payment card merchant pricing. The Merchants Payments Coalition, an umbrella group affiliated with the National Retail Federation, led a chorus of cheers Thursday and Friday in favor of the bill. Other trade groups such as the National Association of Convenience Stores and the National Grocers Association also issued press releases praising the bill. “The introduction of the Credit Card Fair Fee Act follows hearings held by the House Judiciary Committee Antitrust Taskforce on July 19, 2007 that clearly illustrated the unfair and anticompetitive nature of the credit card interchange fee system,” the NGA said. Just as predictably, associations representing the payment networks and financial institutions, the latter of which receive interchange, panned the bill and the merchant groups backing it. “This legislation would establish a government rate-setting board that would impose price controls on the electronic-payments system?despite these groups' years of denials that price controls were their ultimate goal,” said the Electronic Payments Association, whose members include Visa Inc., MasterCard Inc., American Express Co., the American Bankers Association, numerous state banking groups, and some big financial institutions. Lost the debate so far is the complex nature of card pricing and the unintended effects of government intervention, according to payment-industry researcher Gwenn Bézard of Boston-based Aite Group LLC. “I certainly agree with merchants that market power is with issuers and networks, but do you want to have the government involved?” he says. Bézard notes that some merchants receive some interchange income through cobranded card deals with issuers or through their card-acceptance contract negotiations. He also says few retailers have aggressively pursued deals with non-bank processors like Tempo Payments Inc., which targets merchants with lower-cost PIN debit card programs. Instead, merchants are embroiled in a massive federal lawsuit against the bank card networks and some big banks over interchange. “The channel being used today is judges, litigation,” Bézard says. But according to Bézard, who has studied interchange regulation in other countries, consumers in Australia have not benefited since the central bank there imposed rate cuts of about 40 basis points in 2004. Instead, according to press reports, card issuers have raised consumer pricing or scaled back rewards programs. And in the U.S., one unintended effect of the successful Justice Department lawsuit to overturn Visa and MasterCard bans that prevented their member banks from striking card-issuing deals with American Express and Discover Financial Services LLC has been to actually raise interchange as the card networks compete for issuer business.