POINT: Interchange 'Arms Race'

House committee hears fee testimony from merchants, cards, banks, more

WASHINGTON -- The House Committee on Financial Services held a hearing yesterday to address legislation aimed at bringing fairness and transparency to the "unfair and burdensome" credit-card interchange fees that are becoming the second biggest operating expense after labor, utilities and rent for petroleum and convenience store retailers, said the Petroleum Marketers Association of America (PMAA). The legislation, known as the Credit Card Interchange Fees Act of 2009 (H.R. 2382), sponsored by Representatives Peter Welch (D-Vt.) and Bill Shuster (R-Pa.), would address a number [image-nocss] of retailers' concerns with interchange fees.

Testifying before the committee, chaired by Rep. Barney Frank (D-Mass.), were Welch and Shuster, along with Kathy Miller on behalf of the National Grocers Association (NGA) and the Food Marketing Institute (FMI); Mallory Duncan on behalf of the National Retail Federation (NRF) and the Merchants Payments Coalition (MPC); and representatives for consumers and small businesses. Also testifying were Mark Caverly on behalf of the Electronic Payments Coalition (EPC) and representatives for Visa, banks and credit unions.

Shuster urged Congress to act quickly to pass the reform legislation, stating, "I believe action is needed to help level the playing field between consumers, small businesses and credit card companies by requiring greater transparency and prohibiting unfair and abusive practices when it comes to interchange fees."

Duncan said that "no one believes more in the free market than retailers because they work in such a highly competitive marketplace." Duncan said that the interchange fee system is broken which provides little to no oversight and leaves retailers with a "take it or leave it" approach.

Miller was the most compelling witness of the day, said PMAA. She and her husband own a small grocery store in Elmore, Vt., which, like gasoline retailers nationwide, have paid excessively high interchange fees to Visa and MasterCard.

When grocers decide to accept Visa and MasterCard in their stores, they must agree to abide by all Visa and MasterCard rules and all future rules, said Miller. Visa and MasterCard can change the rules at any point and are not obligated to inform the merchants, FMI said in a statement commending Welch and Shuster.

Shuster printed out a complete copy of the rules to show the volume to the committee. "a stack that topped six inches in height."

Said FMI: "The Millers and other merchants who accept Visa and MasterCard are not allowed to set a minimum amount for credit card transactions in their stores. Kathy Miller shared that when she sells a pack of gum, she loses money. When she sells a bag of chips, she makes 2 cents and the bank makes 23 cents. Something is wrong with this picture."

Caverly with the EPC asserted that interchange-fee reform legislation would limit access to credit for small businesses because interchange fees allow credit-card companies to extend credit to millions of Americans.
Duncan said that allowing retailers to negotiate interchange fees would greatly reduce costs of doing business and that it is an empty threat because the interchange fees retailers pay to Visa and MasterCard banks go toward marketing efforts such as the more than 6 billion credit-card solicitations sent to consumers in 2005.

Also, Duncan warned that credit-card companies are in an "arms race" to increase interchange fees and urged passage of the legislation, which would put rules governing the fees under the jurisdiction of the Federal Trade Commission (FTC).

"There is an arms race to create cards with higher fees and more bells and whistles," he said. "The market checks that would normally exist to curb this escalation in fees are diminished because the card companies know that every merchant is required to take these expensive new cards or lose their ability to accept any cards."

The Welch-Shuster bill would require credit-card companies to disclose interchange rates, terms and conditions and give the FTC authority to review interchange and prohibit any practices that violate consumer protection or anti-competition laws. Merchants would be allowed to give cash discounts and set minimum credit card purchase amounts, and could choose which credit cards to accept.

The bill "would allow the most expensive cards to be refused, and while we expect that few merchants would actually refuse cards if this were passed, it would make the card companies think before they reflexively introduce cards with higher fees," Duncan said.

"Most consumers don't know it, but every time they swipe a rewards card with its miles and concierge services, they are driving up the price of everything they buy even higher," he said. "This particularly hurts less-privileged Americans who don't have rewards cards or can't get cards at all because Visa and MasterCard rules effectively require that everyone pay the credit-card price even if they are paying with cash, check, debit card or even food stamps."

He added, "There is no regulator that reviews whether credit-card company rules are unfair, deceptive or anticompetitive. This legislation would deal with this absence of oversight by directing the [FTC] to review card company rules and prohibit practices that meet that description. That is the minimum level of protection that this market needs to begin to function properly."

Interchange is a fee averaging 2% that Visa and MasterCard banks charge merchants each time one of their credit cards is swiped to pay for a purchase. But Duncan explained to the committee that the rate can range from as low as about 1.5% for an ordinary card to 3% or more for "gold" and "platinum" cards that offer rewards like travel miles or concierge services. In recent years, card companies have created an escalating series of rewards cardseach carrying more rewards but also higher feesand "upgraded" millions of consumers. The higher-fee cards cannot be turned down by merchants because of Visa and MasterCard's "Honor All Cards" rule.

Visa and MasterCard rules effectively force merchants to pass the fees on to consumers by requiring them to be included in the advertised price of merchandise and making cash discounts difficult; the result is that the average household paid an estimated $427 in higher prices last year, up from $159 in 2001, NRF said.

Merchants have long sought to offer cash discounts, but Duncan said an amendment to this spring's credit-card reform bill that would have blocked credit-card companies from interfering with that ability was met with "howls of protest" from the card industry and was not included in the final measure.

Click hereto view the House Financial Services Committee hearing and read all of the testimony on both sides of the issue (see related story in this issue of CSP Daily News).