WASHINGTON -- Noting that the convenience and petroleum retailing industry in 2006 paid more in credit card fees that it earned in overall profits, National Association of Convenience Stores' (NACS) president and CEO Hank Armour told the House Judiciary Committee's Antitrust Task Force in written testimony that the rapid increase in fees is unjustifiable and unsustainable.
Armour was among those who submitted testimony before the task force for the July 19 Hearing on Credit Card Interchange Fees. Scheduled to testify at the hearing on behalf of the retail [image-nocss] community were Mallory Duncan, senior vice president and general counsel of the National Retail Federation (NRF)and president of the Merchants Payments Coalition (MPC), and Steven Smith, president and CEO of K-VA-T Food Stores.
The [convenience and petroleum retailing] industry posted $4.8 billion in profits last yearwhich includes profits both at the pump and inside the storebut paid $6.6 billion in credit and debit card fees on its transactions, said Armour. The next time you stop for a fillup, keep in mind that more of the money you are paying goes to the card companies than the retailer selling you gasoline will get to keep.
Armour said that Visa, MasterCard and their member banks engage in activities that violate the antitrust laws of the United States. The collective setting of interchange fees represents an ongoing antitrust violation by the two leading payment card associations, Visa and MasterCard. These antitrust violations cost merchants and their customers tens of billions of dollars annually.
The current interchange rates are not justified by costs, noted Armour. While there may have been some reasonable basis for the size of these fees decades ago, the proliferation of card transactions has driven down per transaction costs. In fact, a bank consulting firm reported last year that the cost of processing transactions was only 13% of the interchange fees charged.
In 2006, the card fees paid by the convenience and petroleum retailing industry increased 22% and represented the second largest operating expense in the industry, behind only labor. Overall, Visa and MasterCard have increased their revenues generated from interchange fees by 117% since 2001 for a total of $36 billion annually. Armour pointed out that about 60% of all interchange in the world is paid by American consumers.
The United States enjoys the highest volume of credit-card transactions in the world. Theoretically, this should lead to significant economies of scale and lower interchange rates. We also have the best technology for processing these transactions and we have very low, and decreasing, rates of fraud. Yet, somehow, U.S. rates are higher than corresponding rates in other countries, he said.
Armour argued that the reason Visa and MasterCard are able to charge such elevated rates for interchange is because they have market power, which they protect through a complex web of secret rules. The rules run more than 1,000 pages, governing every detail of electronic transactions, he wrote. Retailers must contractually agree to abide by all of these rules in order to accept Visa and MasterCard, but retailers do not get to see those rules. Visa and MasterCard make excerpts available, but that is not good enough as retailers often have problems with rules that are not covered by these excerpts. Visa now allows retailers to view the full set of rules only if they sign a non-disclosure agreement and only after they sign a contract agreeing to abide by the rules.
In February 2006 Armour testified on behalf of the retail community at the hearing, The Law & Economics of Interchange Fees, held by the House Energy & Commerce Committee's Subcommittee on Commerce, Trade & Consumer Protection.
Click here to read Armour's testimony.
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