New Merchant Coalition to Focus on Education About Interchange Costs

The first order of business for the new Washington, D.C.-based merchant group formed earlier this year to lobby for regulation of card-interchange rates is to inform consumers and their representatives about the costs they incur because of interchange, says Mallory Duncan, chairman of the Merchants Payments Coalition. “Consumers don't appreciate how much they're paying,” says Duncan, who is also a senior vice president and general counsel at the National Retail Federation, one of 13 retail trade groups that formed the MPC earlier this year as the first organized effort by retailers to gain regulatory relief on interchange costs for credit and signature-debit cards. Other members include the Food Marketing Institute and the National Restaurant Association. Duncan argues an information campaign is necessary to make consumers and their representatives, as well as regulators, aware of interchange costs, which he says push up the prices consumers must pay for goods and services. Interchange, the fee that card issuers collect from acquirers, is passed on to merchants as the largest part of their cost for bank card acceptance. Since bank card network rules ban differentiated pricing, retailers must charge cash payers the same price as credit card users, penalizing all consumers, he says. “The price that's advertised has to be the credit card price,” he says. “This is something most people haven't focused on.” What the coalition wants above all, he says, is “transparency,” the freedom to levy prices linked to actual acceptance costs. “As long as you have transparency, a world where you can price freely, you can give a discount to those who pay by cash or check,” says Duncan. He says current acceptance regulations at Visa U.S.A. and MasterCard International are “designed to maintain [their] monopoly” over electronic payments. The first fruits of the coalition's informational efforts may be an awakening of interest in the interchange issue at The Federal Reserve Board. The group argues the Fed has the authority to control interchange, though it is not yet clear the banking regulator has any intention of intervening in the near future or at all. The Federal Reserve Bank of Kansas City sponsored a conference on the subject in Santa Fe, N.M., last month that drew high-level central bankers from around the world (Digital Transactions News, May 2), a development the MPC says is a hopeful sign for its agenda. “When you see the Fed taking an interest, it might change some minds [at Visa and MasterCard],” says Duncan. The new group is also concerned about discount fees set by American Express Co. and Discover Financial Services Inc., but it says its focus for now is on the bank card associations because “they have the monopoly,” says Duncan, meaning an overwhelming lead in market share for card-based payment. The latest round of changes to interchange rates 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). What might give regulators pause is a report published last summer that merchants in Australia failed to pass on savings to customers after the Reserve Bank of Australia forced the card associations in 2003 to cut interchange by half (Digital Transactions News, Aug. 18, 2004). 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. MPC researchers estimate the cost is $25 billion, with merchants belonging to the coalition's trade groups paying about one-fourth of that. The coalition, made up exclusively of retail trade associations, says the members of its members account for 40% of all credit and debit card transactions in the U.S. Formed at the start of the year, the MPC 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,” according to the group. Although members so far have been merchant trade groups, Duncan says the group hasn't ruled out individual membership by specific retailers.