Next in Merchants’ Cross-Hairs

Acquiring

Next in Merchants’ Cross-Hairs

Lauri Giesen

Fresh from their success in winning regulation of debit card interchange, merchants smell bank blood in the water. That means banks and the networks had better act fast if they want to protect credit card interchange.

Now that retailers have gotten Congress to pass legislation to lower debit card interchange rates, will they be content in their battle with banks and networks over card fees? Not a chance.
There seems to be an almost universal agreement on one major point among those knowledgeable about card payments: Confident from their success with debit cards, merchant groups are going to go back to Congress to get similar concessions with regard to credit card interchange fees.
At stake for banks is far more income than was the case with debit card interchange. Indeed, issuers earn an estimated $25 billion annually from credit card interchange, compared to the estimated $15 billion they take in from debit card transactions.
What is not clear, however, is whether merchants will have the same success with credit as they did with debit, given the new makeup of Congress with a more conservative and possible pro-banking bent.
“It is a dead certainty that [retailers] will go for” legislation that could reduce credit card interchange rates, says Eric Grover, principal with Menlo Park, Calif.-based Intrepid Ventures. “Why wouldn’t they?”
Indeed, retailer groups confirm their interest in attacking credit card interchange fees. “There is no question that there will be a merchant push for credit card interchange reform,” says Doug Kantor, counsel to the Washington-based Merchants Payment Coalition. “What it will look like, we are not yet sure. We are not talking publicly about how any proposal will look compared to debit cards, but there is no question there will be legislation proposed on credit cards.”
Another retailer group also has made it clear that debit card pricing reform is not the end of the line for retailers. In a December 2010 article for Digital Transactions magazine, Mallory Duncan, senior vice president and general counsel at the Washington, D.C.-based National Retail Federation, made it clear that retailers won’t be content with reforming debit card fees.
“Regardless of what happens with the Durbin Amendment and the DoJ lawsuit, neither is the end of the story,” he said, referring to the section in the Dodd-Frank Wall Street Reform and Consumer Protection Act that calls on the Federal Reserve to regulate debit card interchange, as well as a settlement Visa Inc. and MasterCard Inc. reached with the Department of Justice that allows merchants to discount transactions on lower-cost forms of payment.
A Skeptical Congress
It’s not the end of the story because the biggest complaint retailers have with electronic payments—credit card interchange rates—has not been resolved by past legislation or judicial rulings.
“Neither [Dodd-Frank nor the DoJ settlement] takes direct aim at the biggest issue of all—credit card interchange fees themselves. That is why retailers still support passage of the Credit Card Fair Fee Act, sponsored in the Senate by Durbin and in the House by Judiciary Committee Chairman John Conyers, D-Mich.,” Duncan added.
The Durbin Amendment was sponsored by Sen. Richard Durbin, D-Ill., and was added to the Dodd-Frank financial reform law passed by Congress this summer. The Amendment orders the Federal Reserve Board to devise debit card interchange regulations that would change longstanding payment network rules and practices, and directs the Fed to set rates that are “reasonable and proportional” to issuers’ direct costs. It applies to all financial institutions above $10 billion in assets.
The law also directs the Fed to release its final set of rules by April, though there has been much interim fact-finding, and most observers expect rates to be slashed dramatically.
Now, with the momentum of Dodd-Frank behind them, many merchants argue that they need to push for further interchange reform. “You have to strike while the iron is hot,” says Dennis Moroney, research director for Needham, Mass.-based TowerGroup. “And my sense is that the retailers will strike. They are highly motivated to do what they think is necessary to reduce their card costs.”
Even those on the card issuing side agree that credit card interchange reform is next on retailers’ agenda. “That has been their goal all along. It’s the golden ring. Don’t believe that retailers spent $10 million in lobbying funds just to walk away with lower debit card fees. What they really want to go after is credit,” says Trish Wexler, spokesperson for the Washington D.C.-based Electronic Payments Coalition.
But will the new Congress be as responsive to future proposed legislation regarding card payments? That is not clear given the shift from Democratic to Republican control of the House—and with it a change in the leadership of the key committees, such as the House Financial Services Committee, that would draft and push to the House vote any proposed bills that deal with payment issues.
“The Republican leaders on the key committees both in the House and Senate have a greater appreciation for what is involved with interchange and the cost of issuing credit cards,” says Wexler. “And the newly elected Congressmen appear to be less receptive to changes in card fees.”
Even retailers believe the new Congress will be tougher to argue their cause to than the Congress of 2010. In his article, the NRF’s Duncan noted, “Winning passage of additional measures during the upcoming session of Congress could be tougher given the amount of Wall Street money that poured into the 2010 campaign.”
One retailer is so convinced that Congress will be harder this time around that he argues retailer resources would be better spent appealing to the courts than Congress.
“It is essential that credit card issues be addressed and I would welcome any efforts to get Congressional support for lowering credit card interchange, but I do not expect that support to come from the current Congress,” says Mitch Goldstone, president and chief executive of ScanMyPhotos.com, Irvine, Calif.
“Retailers might do well to shift their attention to the courts as opposed to the legislature given the current Congress. The new conservatives coming into Congress have been silent on the issues of credit cards and appear to have strong backing from the bank lobby,” adds Goldstone, who was one of the first of a large batch of merchants who sued the networks and major banks over interchange five years ago. Those cases have been consolidated in a federal court in Brooklyn, N.Y.
Rallying Customers
Card issuers and their supporters believe they can make a stronger argument for the status quo on credit card rates than they were able to for debit cards. “There is a strong value with credit card acceptance for retailers. Consumers spend more in stores if they can use credit cards. The value of accepting the cards trumps [the rate] merchants are going to pay and Congress understands that,” says Wexler.
Additionally, issuers may be able to make a stronger case that credit card programs cost them more than debit cards given the float involved, default rates, and higher levels of fraud.
And bankers, still licking their wounds over Dodd-Frank, are not likely to let the same thing happen with credit. Many believe issuers will be more aggressive in making their case, not just before Congress but to consumers as well.
While Grover believes card issuers have a strong argument, he does not believe they have done a good job of getting their argument heard. While Visa, MasterCard, and the banks lobbied against the debit card fee limitations, many of the big card issuers themselves did little to convince Congress and voters of their cause, Grover says.
“Visa and MasterCard never really made a strong case before Congress, while the retailers did an excellent job of convincing everyone that card interchange was bad for consumers,” Grover says.
Indeed, much of retailers’ support for restrictions on debit card interchange was based on their argument that the cost of interchange to retailers is passed on to consumers through higher prices. But Grover says banks and their networks did a poor job of arguing that the funds issuers collect from interchange go toward paying for features that benefit consumers.
Many bankers have argued that if their revenue from debit or credit is reduced, they won’t be able to offer the lucrative perks associated with rewards programs—such as cash back, airline miles, free gifts, or discounts. And they will have to start charging customers more to have credit cards, they have said.
But Grover argues issuers need to make that argument in a loud voice to their cardholders—and start doing it now.
“Consumers take for granted that they will pay no fees for their cards and get lots of rewards when they use them. But many card issuers are expected to drop rewards on debit cards now and even start charging fees to at least some of their customers. On the credit card side, it will get even worse,” Grover says.
But banks may be more aggressive in drumming up consumer support this time around, Grover says. He believes some of the big issuers could even include fliers inside credit card statements explaining their argument and letting consumers know that if they enjoy no-fee, rewards-rich cards, they had better call their Congressman and Senator and let them know they oppose restrictions on interchange.
“If Chase, Bank of America and Citibank began to rally their customer bases, it could make a real difference. There are 160 million card users out there and the card issuers have access to communicate their message to them. The retailers won [on debit card interchange] because they got consumer support. The banks did not try as hard,” Grover says. Visa has referred all questions regarding possible attempts on credit card interchange to the Electronic Payments Coalition.
The Small-Business Card
But not everyone believes the banks will be successful in getting consumers to buy into their argument that the current interchange structure benefits cardholders.
“There is a real negative consumer sentiment against banks right now. Consumers are angry at banks because of issues that have nothing to do with credit cards but banks are easy to blame for a lot of problems right now, and it is not a good time for banks to try to lobby consumers to support their cause,” says TowerGroup’s Moroney.
Meanwhile, merchants haven’t necessarily written off the new Congress. Kantor of the Merchants Payment Coalition argues that the House shift toward Republican control is not relevant since merchants had bipartisan support for debit card fee limits. “We had both Republican and Democratic supporters. I’m not sure that change in Congress will hurt our support,” he says.
And while Kantor concedes that many of the newly elected Congressmen are highly conservative and take a laissez faire approach to financial issues, he counters that many were elected on a pro small-business platform. That appears to be the position that merchant groups will take with regard to any proposed legislation dealing with credit card fees.
“Many of these new Congressmen said that helping small business was a top priority. And credit card fees are one of the biggest impediments to small businesses. Payment card fees are the second highest operating cost for small convenience stores and grocery stores, only behind labor costs. Rent costs are typically even less. If Congressmen really want to help small businesses, this is their single best way to do so,” Kantor says.
Card issuers, mean­-while, are likely to argue that it is funds from card interchange that will pay for future innovations in electronic payments.
Says Wexler: “There are a number of fresh innovations coming out in mobile payments and the like that will benefit retailers and consumers. Congress is not going to want to regulate something that hinders innovation.”