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Step In or Step Back?

In a first-ever forum, Federal Reserve debates its role in regulating interchange fees

SANTA FE, N.M. -- Australia, Mexico, Spain and the United Kingdom: All of these countriesand the European Unionhave or are currently throwing their muscle behind the interchange-fee issue. In what many in the industry have lauded as the first step in a long journey toward interchange regulation, a recent forum held in Santa Fe, N.M., by the Federal Reserve Bank of Kansas City questioned whether the United States should do the same.

Interchange Fees in Credit- & Debit-Card Industries: What Role for Public Authorities? brought together a select audience [image-nocss] of international financial experts, credit-industry leaders and Federal Reserve representatives to discuss whether the government should act as referee between plastic issuers and merchants, to help ensure interchange fees charged to merchants are fair.

According to Morgan Stanley, the average interchange rate has risen 17 basis points between 1998 and 2004, while interchange dollar volume mushroomed 85% to reach $17.4 billion nationwide.

While issuing banks represented by Visa and MasterCard in the United States set the toll paid by merchants for each plastic purchase, countries such as Australia have stepped in to force card associations to follow a cost-based interchange structure, one that transparently reflects the exact costs incurred in support of the payment transaction, plus a set margin. At the May forum, representatives from federal banks in Australia, Mexico and the European Union presented their countries' efforts at doing just that.

But government intervention has its fans and naysayers. Readers might recognize the name Lloyd Constantinethe lawyer was lead counsel for merchants in the Visa Check/MasterMoney antitrust litigation that resulted in a sizeable settlement for Wal-Mart and other retailers. In a presentation at the forum, Constantine argued that today's credit- and debit-interchange situation shows clear signs of market failure. Visa and MasterCard have dominant market power. This market power has been stable and increasing for more than a decade, he said. The barriers to new entrants are almost [insurmountable].

Constantine likened Visa and MasterCard to a cartel that fixes the prices of interchange fees paid by merchants and ultimately by consumers, and urged the Federal Reserve to step in and reclaim responsibility over the trade.

Meanwhile, Noah Hanft, general counsel for MasterCard International, Purchase, N.Y., gave a spirited defense of the U.S. interchange-fee structure, charging that class-action lawyers such as Constantine have whipped up a controversy over what is actually a legal, defendable practice. He and his fellow class-action lawyers appeal for clients so that they can extract enormous fees for themselves and their colleagues, said Hanft. His speech vividly demonstrates that at bottom, it is not about economic theories. It is not about market realities. It is about pure and simple money-lust.

However, as Constantine observed in his own presentation, the forumwhich featured speakers from Visa, banks, learning institutions and the federal governmentfeatured no speaker to officially represent the merchant's perspective.

Despite the contentiousness of the three-day gathering, it was keenly aimed at beginning the public debate on what has proven a particularly costly issue for retailers in the convenience industry and beyond.

For the full text of Constantine's remarks, click here.

For the full text of Hanft's remarks, click here.

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