Unreasonable Fees, Unfair Process'

Merchants laud Senate legislation to deal with interchange fees

WASHINGTON -- Senator Richard Durbin (D-Ill.) late last week introduced the Credit Card Fair Fee Act of 2008, legislation that addresses the credit-card interchange fee, which cost Americans $42 billion last year. The House version of the bill was introduced in March by Representative John Conyers (D-Mich.) and Chris Cannon (R-Utah) and has received bipartisan support.

"We welcome this effort to stop the price-fixing and create a transparent market-based process for credit-card interchange fees," said Hank Armour, chairman and CEO of the National Association of Convenience Stores (NACS), [image-nocss] a member of the Merchants Payments Coalition (MPC). "This legislation is an approach to fix the broken system through a competitive market outcome by allowing merchants a seat at the negotiating table."

MPC member the Food Marketing Institute (FMI) also lauded the introduction of legislation. "This law gives retailers a seat at the table to negotiate fair and reasonable transaction fees with credit card companies," said John J. Motley III, FMI senior vice present of government and public affairs. "It would put an end to the anti-competitive and anti-consumer system in which the credit card company networks fix these fees in secret with impunity. Americans pay among the highest fees in the developed world, while competition, economies of scale and decreasing computer and communications costs should make our fees the lowest. The absence of competition in a market controlled by two credit card networks has fostered a system that violates the fundamental principles of free enterprise."

Currently, credit-card interchange rates are set in secret, hidden from view and exclude merchants from the negotiating process, said the MPC.

With a collective market share of approximately 80%, Visa and MasterCard operate like price-fixing cartels, the coalition said, each one imposing oppressive credit-card interchange fees and rules on merchants on a "take-it-or-leave-it" basis. According to Durbin, the legislation introduced today "will protect consumers and retailers by preventing credit-card companies from using their market power to charge unreasonable fees through an unfair process."

Late last month, Durbin, along with Senators Snowe, Kohl and Specter, sent letters to Visa and MasterCard asking for a detailed explanation of the process by which they set their interchange fee rates. According to a statement by Durbin, responses by the card companies again failed to adequately explain how they decide what interchange rates to charge.

Interchange fees amount to approximately $2 of every $100 spent using credit cards. These fees inflate the cost of nearly everything consumers buy whether they use plastic, cash, check or food stamps. In effect, most consumers are taking two hits to their wallet: one from the interchange fee and ones from the fees in their statement, MPC said.

"Interchange fees are the biggest credit card fee you've never heard of," added Armour. The $42 billion in interchange fees paid by retailers and consumers in 2007 dwarfed most other credit-card fees put together, including late fees, over-the-limit fees, annual fees and inactivity fees, the group said. "If we do not act now, we will continue down the road of unaccountable fee-setting which will lead to more harm to retailers and consumers in the form of high fees."

The credit-card industry has come under increased scrutiny from the public, consumer groups, the Federal Reserve and Congress in the past three years for their unfair practices, policies and fees, MPC said. Interchange fees have been the subject of hearings three times in recent years under both the Republican and Democratic congresses.

The MPC is a group of retailers, supermarkets, drug stores, c-stores, fuel stations, on-line merchants and other businesses who are fighting against unfair credit card fees and fighting for a more competitive and transparent card system that works better for consumers and merchants alike. The coalition's member associations collectively represent about 2.7 million stores with approximately 50 million employees.