Retailers such as Target Corp. say banks make so much money from the fees that they give credit cards to people who can't pay their debts, just as they provided mortgages to homeowners who can't afford them. "It's another version of subprime lending," said Mallory Duncan, chairman of the Merchants Payment Coalition (MPC) [image-nocss] representing trade groups for 2.7 million gas stations, drug stores, supermarkets and other retailers. "The system should be fixed before we are in a position of having to bail out more banks."
Duncan, a registered lobbyist, is senior vice president and general counsel of the National Retail Federation (NRF).
The merchants want an antitrust exemption so they can band together to negotiate with banks over the interchange fee, usually between 1% and 2% of the purchase price, that a retailer's bank pays the cardholder's bank each time a customer swipes a credit card. The retailer's bank then collects the fee from the merchant. Consumers don't see the charge, which merchants say is built into their prices.
"This is a significant issue for us, and a very high cost for us," said Eric Hausman, a spokesperson for Minneapolis-based Target, the second-largest U.S. discount retailer. "We do expect the next Congress" to look into the issue, he said.
Retailers say the fees should be part of the discussion when Congress returns in January and looks at overhauling bank rules. So far, the merchants have pushed their proposal without success. The House Judiciary Committee approved it in July, though it hasn't reached the full House or Senate.
Banking groups and the credit-card companies say the interchange fees ensure that retailers get paid even if cardholders default. If the fees were onerous, merchants wouldn't be so eager to take credit cards, they say.
"You have a choice of whether or not you want to accept plastic," said Jason Kratovil, vice president for congressional affairs for the Independent Community Bankers of America (ICBA). "If the pros outweigh the cons, you do it. It makes a real pithy sound bite to make it that these big banks are out there to gouge consumers."
Among the largest credit-card issuers is New York City-based Citigroup Inc., which has received a U.S. government rescue package, including $20 million in cash. Two more credit-card issuers, Bank of America Corp., Charlotte, N.C., and JPMorgan Chase & Co., New York, were among nine financial institutions receiving $125 billion from the Treasury in October.
"I am connecting the dots with the credit-card industry and the mortgage industry," said Lyle Beckwith, a senior vice president with the National Association of Convenience Stores (NACS).
The banks say credit-card fees cover operating costs, protect banks against default and fraud, and allow them to offer cards with no annual fees and rewards. The charges vary from bank to bank and depend in part on whether the card includes cash rewards or other benefits. Without the ability to recoup costs, smaller banks wouldn't be able to issue cards and compete with the larger institutions, said Paul Weston, president of TCM Bank NA in Tampa, Fla. "You'd see a reduction in the number of accounts," he said. "You'd dial back the features on the account. Some banks would reintroduce fees."
Financial institutions and their trade associations formed the Electronic Payments Coalition (EPC) to oppose the legislation, arguing that merchants are simply trying to reduce costs. "Like any business, they want to find ways to lower their cost of doing business," said Trish Wexler, a spokesperson for the coalition, whose members include New York City-based American Express Co., Citigroup and San Francisco-based Visa Inc. "We believe that going to Congress and asking for consumers and for the financial institutions to pay is the wrong way."
Beckwith, whose organization's members include Dallas-based 7-Eleven Inc. and San Ramon, California-based Chevron Corp., said banks got away from the business model of determining how much a house was worth and how much a homeowner could afford. "The credit-card business is run by the same banks the exact same way," he said. "They're not in the business of making loans based on the ability to repay, they're sending out cards based on a business model of making money off the interchange fee."
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