Two Years After Landmark Retail Debit Settlement, Interchange Back on Front Burner

SANTA FE, N.M. – Credit unions probably shouldn’t start worrying yet, but another battle over credit and debit card interchange which has the potential to further erode credit card profitability has apparently begun to brew. The Federal Reserve Bank of Kansas City sponsored a conference over May 4-6 in Santa Fe, New Mexico which looked specifically at what the role of public authorities should play, if any, in setting interchange fees. The invitation-only conference included executives from all portions of the card payments industry. Interchange is the money retailers and other card acceptors pay to credit and debit card issuers to be able to accept the cards. Traditionally the funds have gone to cover things like card losses through fraud and the costs of networking to enable the electronic transactions to go forward. After the settlement of a landmark lawsuit brought by retailers against Visa and MasterCard over debit card interchange two years ago, the two brands generally negotiate interchange rates with their largest users – retailers in big box stores like Wal-Mart, for example – and then promulgate a schedule of interchange rates for the rest of the retail industry which is based on the number of transactions the retailer makes and the kind of transaction it is. Transactions over the Internet, for example, or the phone, generally carry the highest interchange while transactions at grocery stores and gas stations generally carry among the lowest interchange rates. But retailers from the Internet to the grocery industry have begun to complain that interchange rates are too high, averaging almost $2.00 per every $100.00 spent on cards, and their complaints have drawn the attention of federal regulators who convened the conference in order to examine what, if anything, they should do. And, unlike two years ago, the complaints are not limited to merely debit cards but include, and even emphasize, credit card transactions and therefore have much greater chance of hurting credit unions’ credit card income if interchange rates are regulated downward. Partially both in response to the hearing and partially to further their goals, the retailers have formed an organization, the Merchants Payment Coalition, to lobby the federal government with their case that their costs of accepting credit cards is simply too high and that the Federal Reserve should step in to regulate it, though the retailers will not say what form such regulation might take. “Right now we are just hanging back and waiting to see what the Fed might do,” said Craig Shearman, vice president for public relations with the National Retail Federation. “But we are very serious about this and determined to see it through,” he added. Shearman asserted that the retailers fundamentally believe they should not be charged any interchange at all, or at most only a small amount, because the credit card issuers are the ones that really benefit from every transaction. “When you consider the finance change rates and the fees they charge consumers, they have made credit cards extremely profitable and with card fraud losses down and volume growing, we don’t believe they should charge us anything,” he said. Shearman also pointed out that in other countries card issuers pay retailers interchange for taking their cards. Officials from other Merchant Payment Coalition members, which includes trade associations representing retailers, restaurants, supermarkets, drug stores, convenience stores, gas stations, online merchants and other businesses that accept credit and debit cards, echoed Shearman’s complaints. “The fees that the credit card companies charge defy logic and they are using them to increase profits far more than to provide any meaningful benefits to retailers,” coalition Secretary Teri Richman, senior vice president for public affairs at the National Association of Convenience Stores, said. “Credit card company rules effectively prohibit retailers from providing discounts for cash or checks in all but a handful of situations. As a result, consumers pay more even when they don’t use their cards. It’s time for this constant picking of consumers’ pockets to come to an end.” Shearman and other representatives from the Coalition trade associations charged that, with fraud costs and other expenses down, both Visa and MasterCard and big card issuers were using their interchange funds not to cover losses but instead to enhance their card products with rewards programs and other perks in order to better compete in the competitive card market. “Let me be clear here,” Shearman said. “Competition is great and I fully support firms putting strong card programs into the marketplace, but making those programs stronger should come out of their profit margin, not ours.” But MasterCard and Visa, primarily MasterCard, have answered back strongly, asserting that both merchants and consumers have benefited from having greater access to credit and debit cards and the interchange rate is a small cost given the benefits both types of cards bring. In comments prepared for a keynote speech at the Santa Fe conference, Noah Hanff, general counsel for MasterCard, charged that the agenda of high-priced lawyers played more of a role in bringing the issue to the Federal Reserve than any legitimate complaint from the retail community. “There is no evidence otherwise, and there is no legitimate basis to call for regulation of interchange fees,” Hanff’s comments read. “There is one, and only one reason class action lawyers are increasingly trying to align themselves with regulators and only one reason they are out knocking on doors, making phone calls searching for retailers to bring an interchange lawsuit. “Because, ladies and gentlemen, it’s not really about high interchange fees, it’s really about high attorney’s fees. Yesterday, we all heard from one class action lawyer who is articulate and well spoken. But make no mistake about it, he and his fellow class action lawyers appeal for clients so that they can extract enormous fees for themselves and their colleagues. 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,” his speech said. Hanff strongly defended interchange on the grounds that consumers and merchants get a great deal with MasterCard; that interchange is essential to four-party systems and cannot be analyzed as a fragment in isolation from the whole; that interchange is highly beneficial, efficient, and pro-competitive; and, no one has found interchange to be illegal. Hanff also noted that none of interchange’s critics were attacking American Express’s interchange, even though it is notably higher than Visa or MasterCard’s and thus the attack translated into an assault on one form of payment system and not on another. No one, as of now, appears to know where all this might be going. Shearman and the retailers clearly hope for some sort of regulatory proposal from the Federal Reserve this year, but observers from the issuer’s side of the controversy downplay that expectation. “So far, the Fed has indicated it is neutral on interchange matters,” Shearman said, “but the number of high-level officials attending the recent interchange conference gives us reason to hope that the Fed plans to do something substantive on the question.” But Moshe Orenbuch, a stock analyst for Credit Suisse First Boston, cast doubt on whether anything would happen this year or next. “Everyone can hope, of course, but I am not sure their [the retailers] hope is well placed,” Orenbuch said. “None of the officials I spoke with at that meeting appeared to want to regulate interchange rates,” he concluded. -