Summary
The primary story here is not the card industry's standard defense of bankcard interchange fees. It is that Visa and industry trade associations are responding to the clear and present danger that an angry Congress is going to side with merchants by enacting a law to limit interchange fees. Their defense of the fee is that polling of consumers shows a wide majority in favor of charging merchants for accepting cards. But it doesn't address whether current fees are too high and unfairly applied.
Analysis
If Congress enacts a law, the bankcard networks and their issuers could lose billions in revenues, thus forcing higher APRs on cardholders. It also holds the risk of increasing the industry's exposure in the interchange antitrust lawsuit in Brooklyn. In effect, a potentially very costly double whammy. The industry has the better argument vis-a-vis new legislation. Namely, that price controls invariably backfire, and in this case will screw not only consumers but merchants in lost sales. Their argument that merchants will pocket any reductions in interchange fees will probably fall on deaf ears, as there is no way to prove it. Their argument that current interchange practices are fair probably will also fail in Congress. It's an argument that hasn't succeeded anywhere else around the world. The latest proof of this is the networks' settlement of the issue in New Zealand in favor of the merchant position. In the EU, the EC has all but decided that the bankcard industry is a cartel involved in price fixing. Congress is hearing the same defense that hasn't persuaded foreign governments anywhere. Visa and MasterCard set interchange fees that they charge to merchant banks, knowing the fees will be passed on to merchants and paid through network settlement systems to issuers. The fees are nonnegotiable and V & MC don't receive a cent of them. All they do is collect it for issuers. In effect, the fee is an issuer fee -- a fee charged by banks. And nowadays nobody likes banks. Bottom line: interchange legislation in some disturbing form will happen next year, unless the bankcard industry settles the Brooklyn lawsuit in a way that resolves the issue for years to come. Put another way, the industry can best prevent legislation via self reform -- a negotiated deal with its adversaries in court.
