Interchange, Duopoly's and Politics...Oh My!

As the House Judiciary Committee meets today to consider a mark up of H.R. 5546, the "Credit Card Fair Fee Act of 2008," many credible organizations and regulatory bodies have voiced significant concerns about this legislation.



The Department of Justice (DOJ), in a letter to U.S. Rep. Lamar Smith (R-TX), wrote that the establishment of the three-judge electronic payments panel raises constitutional concerns, that it would harm competition and consumers, and "cannot replicate the flexibility that is found in the free market." Editor's Note: Agreed!



In a letter to U.S. Rep. John Conyers (D-MI), the Pentagon Federal Credit Union shared its concern over the legislation, which it believes would increase costs and decrease card awards programs for its members, while merchants pocket the savings. Further, the letter underscores that "government controls involving the establishment of a very complex pricing regime would in our estimation more advantageously be informed by America's free market system."



I agree, as my take on the subject is simple. Alternative Payments exist for a reason. For example...online retailers can lower their interchange fees by up to 100 basis points by simply switching to an alternative payments system, such as the one offered by HomeATM. The only reason I see for involving a governmental body is when unfair competitive practices preclude a free-market system.



I know the free market is already "riddled" with bullets of regulation, but, nontheless, riddle me this? As long as payment options such as HomeATM are on the table, why on earth would anyone want our free market system crippled with government regulation?



Nordstrom's Executive VP, Kevin Knight may have said it best when he told the Judiciary Committee in a letter that Nordstrom believes that interchange fees represent "a fair price for the services we receive," adding that "we prefer market competition to regulation."



Editors Note: Call me a PIN Head by I consider Mr. Knight to be a Patriot! (and a man who doesn't go crying to Mommy everytime things don't work out...as it seems the NACS and NRF are doing). Here's a great(and juicy) story from POLITICO on the subject of today's hearing:

On credit card fees, blame game begins

By: Chris Frates July 15, 2008 04:47 PM EST



The nation’s retailers have found some fresh, sympathetic faces to help them lobby Congress to rein in credit card fees: gas station owners. The small-business people have descended on Capitol Hill to explain how credit card fees tied to skyrocketing gas prices are crushing their profit margins. And while the politically poignant pitch might grab headlines, it’s got one big problem: It’s not true, (according to the financial services industry).



More than a year ago, MasterCard capped its fees and charged only on the first $50 of gas pumped; anything over that was fee-free.



But those savings were not passed along to gas stations or their customers, leaving lobbyists to accuse oil companies of pocketing the difference.



“Big Oil has been picking the pockets of their franchisees, blaming Visa and MasterCard for the theft and encouraging their aggrieved small-business owners to visit Capitol Hill with the message that it is the banks, and not Big Oil, that have wronged them,” said a Republican financial services lobbyist.



The American Petroleum Institute said it was not privy to the details of business arrangements among card companies, retailers and suppliers. But the charge did not sit well with merchants. “This has nothing to do with Big Oil. They’re (Visa/MasterCard) trying to deflect the criticism from them to someone they perceive has as bad a public image as they do.



This is about Main Street vs. Wall Street,” said Lyle Beckwith, chief lobbyist for the National Association of Convenience Stores. Gas stations have not seen a cap on the fees, which has prompted Beckwith’s organization to question whether MasterCard even implemented its cap.



In fact, about 40 percent of the nation’s gas stations couldn’t have been cheated by the oil companies, as the financial industry claims, because they aren’t branded franchises. It’s a fight that has both sides blaming industries that everybody loves to hate. The merchants have tried to paint the fees as gouging by greedy credit card companies, which, in turn, have charged oil companies with skimming money from their retailers. It’s a classic Washington story: two major industries fighting over the bottom line.



One thing both sides agree on is that the battle is over far more than the fees paid by gas stations. The charges, called interchange fees, are paid by all retailers each time a customer swipes a Visa card or MasterCard. Merchants are upset because they have no say in how the fees are determined, even though it makes up the bulk of the card processing fees charged by their banks. MasterCard and Visa set the interchange rate to reimburse the customer’s bank for sending payment to the merchant’s bank.



The fee helps cover some of the risk that the customer won’t repay the bank. Neither MasterCard nor Visa profits from the fee, industry officials said. (say again?)



The merchants complain that MasterCard and Visa have a virtual duopoly. To inject competition into the market, retailers are pushing legislation to grant them an antitrust exemption to directly negotiate the interchange rate with the credit card companies. If an agreement is not reached, the parties would submit rules and rates to a three-judge panel to choose the plan that best reflects a competitive market. The financial services industry opposes the move because it would give the nation’s 9 million retailers the power to collude and dictate the interchange fee. Besides, industry lobbyists argue that competition already exists in the market. If the companies set the rate too high, merchants won’t accept their cards. If the rate is set too low, banks won’t offer the cards to their customers. The two constituencies together are a built-in equalizer.



The debate has sparked a huge lobbying campaign marked by Capitol Hill visits and briefings, coalitions and ad campaigns.“You essentially have the entire financial services industry working against these bills,” said Scott Talbott, chief lobbyist for the Financial Services Roundtable, which represents 100 of the nation’s leading financial services firms. Last month, the Roundtable held a briefing for about 50 congressional staffers and flew in executives from banks and credit unions for 33 office visits. When Congress held a hearing on the bill in May, the Roundtable spent about $75,000 on print advertising. The financial services industry argues that the legislation doesn’t require retailers to pass any negotiated savings to consumers.“They want all the wonderful things that come with a vibrant electronic payment system and the millions of customers who see the value in using credit and debit cards, they just don’t want to pay for it,” said Jason Kratovil, a lobbyist for the Independent Community Bankers of America.



A balanced interchange fee is what allows a $100 million community bank to offer the same cards as a behemoth like the $1.7 trillion Bank of America, Kratovil said. If the government steps in to help merchants depress that rate, smaller banks will no longer be able to cover the cost of offering the cards, which means fewer choices for consumers.



But the merchants argue that they’re not asking the government to set prices but to allow them to negotiate. National Retail Federation Senior Vice President Mallory Duncan, chairman of the Merchants Payments Coalition, argued that giving retailers the ability to negotiate a lower fee would allow them to pass along the savings to consumers through lower prices.



The allegation that merchants would pocket the difference is untrue, he said, because retail is “the most competitive industry in America,” with an average after-tax profit margin of 2 percent. Visa and MasterCard “have, for years, had thousands of banks acting as a cartel to set this system up,” Duncan went on. “For them to have to face mano a mano competition sounds like they doth protest too much.”



In fact, by capping their fees on gasoline purchases, Visa and MasterCard have “implicitly acknowledged that their interchange fees are driving up the cost of gas,” he said.“What they haven’t said is that it’s driving up the cost of food, the cost of clothing, the cost of vacation travel, everything else that consumers purchase is being driven up by the cost of these exorbitant credit card fees.”



That argument is wrongheaded, according to Visa spokeswoman Randa Ghnaim. There’s a cost to accepting credit cards just as there is for accepting cash and checks, she said. Industry officials said Visa and MasterCard capped gasoline fees because the companies understand that station owners make only about a dime on each gallon of gas, no matter how much a gallon costs. They hoped the savings from reduced fees would be passed on to consumers. Still, when gas prices rise, so does the amount of risk banks are taking when they loan their customers the money to pay at the pump, said Peter Madigan, executive director of the Electronic Payments Coalition.



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