WASHINGTON – Confusion, lack of clarity and a high degree of tension marked a Feb. 15 hearing on credit and debit card interchange before the House of Representatives Energy and Commerce Committee's Subcommittee on Commerce, Trade and Consumer Protection. Even though the committee has jurisdiction over the topic as a consumer matter, many legislators' lack of experience with financial institutions or financial products meant that many of the questions and answers from the legislators had to do with very basic credit card industry details. "Although electronic payment is now commonplace – now outpacing check transactions – I think it's safe to assume very few consumers understand or are even aware of the electronic payments network, the transactions involved, or the related fees," said Cliff Stearns, (R-Fla.), Chairman of the Subcommittee in his opening statement. The problem was that many of the committee members did not appear knowledgeable either. Four witnesses appeared at the hearing. Timothy Muris, a former chairman of the Federal Communications Commission and currently an economics professor and lawyer affiliated with the Washington D.C. firm of O'Melveny and Myers appeared on behalf of the Electronic Payments Coalition. Henry Armour, CEO of the National Association of Convenience Stores, appeared on behalf of his organization. Karen Kerrigan, CEO of the Small Business and Entrepreneurship Council, appeared to offer a small business perspective and Ed Mierzwinski, consumer program director for the U.S. Public Interest Research Group, appeared to represent consumer groups. The Electronics Payments Coalition is a group which includes both Visa and MasterCard along with assorted large issuers. In many ways, the witnesses' positions were predictable. From Muris' perspective, merchants have raised the interchange issue because they are unwilling to pay the costs of having consumers use debit credit cards in their stores even though they are quite happy that they have the convenience to do so. "The merchants' efforts to regulate prices, therefore, pose a direct threat to the American consumer." Muris told the Subcommittee. "If consumers understood the threat that the merchants' campaign poses to the plastic in their wallets, I suspect that we would see nothing less than a revolt. I have witnessed the full fury of the aroused American consumer. While chairman of the Federal Trade Commission, I led the agency in riding a wave of public resentment to create the National Do Not Call Registry. I suspect that many Americans feel as strongly about their plastic as they do about their dinner hour." Muris repeated Visa and MasterCard's three main previous points in discussions of these topics: that American consumers and businesses benefit from the use of cards, that the card system depends on a fixed interchange rate, and that capping interchange rates would only end up hurting consumers in the end. But he added one as well, that the merchants' current 47 lawsuits against Visa and MasterCard threaten the continued viability of the payments system, and he also used the Australian experience as an example of why capping interchange rates would not help. "The plaintiffs' lawyers and the relatively few merchants they have attracted as clients allege that the setting of interchange fees is a conspiracy in restraint of trade," he argued. "The normal antitrust remedy in this situation would be to end the allegedly fixed price. The networks then would no longer set interchange fees. But the plaintiffs and, more importantly, merchants as a whole cannot possibly want that relief. It would, for the reasons explained above, harm consumers and threaten the existence of Visa and MasterCard as we know them. Instead, the plaintiffs want the judge to himself fix prices for the industry, but do so at a lower level." The Australian government capped interchange fees in 2003 and, since then, studies have shown that Australian consumers have paid higher card fees and not seen the lower prices which proponents of interchange caps claim they will bring. Muris argued the merchants want the courts to do the same thing in the U.S. For their parts, the merchant arguments were somewhat split. Armour countered Muris with the charge that the market is broken because his members effectively have no choice but to take the cards and accept the fees that they cannot negotiate. "Credit and debit card transactions are a large and growing part of retailers' business," Armour said. "In the convenience store industry, around 60 percent of motor fuel sales are paid for with credit or debit cards. Across all industries in the United States, in fact, the number of electronic payments, most of which are credit and debit card payments, now exceeds the number of payments by check. Plastic transactions have simply become the most predominant method of payment. My members have to take credit and debit cards." Armour claimed that in 2004, the average convenience store paid $31,000 in interchange fees or only $5,000 less than the average convenience store paid in federal, state and local taxes. "The fact that our members on average are paying almost as much to the credit card companies each year as they are making before they pay Uncle Sam gives you a sense of just how broken this market is," Armour said. But Kerrigan said her organization of small businesses and entrepreneurs is cautious about any proposed solution to the interchange dilemmas which would seem to include price controls, whether set by the government or the courts. "Do small business owners and SBE Council members like paying interchange fees?" Kerrigan asked. "Or course not. They would much prefer that these costs were lower or nonexistent, similar to other external costs such as electricity and rent. At the same time they bemoan paying those fees, most SBE Council members, as well as various small business owners who have sent us comments on this issue, recognize that government regulations has the potential to cause dislocation to a system that has generally served them well." She agreed with Muris that cards have increased merchant sales, provide rapid and certain payment with reduced costs and fewer headaches than dealing with checks. Cards have also enabled Internet commerce, she pointed out, something which neither checks nor cash can do. Mierzwinski largely backed up Armour's testimony, particularly his allegations that the size of Visa and MasterCard give them a market dominance which is illegal and allows them to fix prices in an illegal manner. He also suggested that all consumers pay a cost for these high interchange fees even if they do not use cards. "Hypothetically, if a U.S. merchant paid 2% in interchange fees and 50% of its customers paid with plastic, then its costs which must be recovered across all consumers, have increased an average of 1," Mierzwinski said. He also shared an e-mail he had received from a small business owner. "I own a small gas/convenience store in Washington state," Mierzwinski's e-mail ran. "Recently a customer `told' me to process her debit as a credit since she got a small fee back from U.S. Bank debit card. Now, I know how high the fees are for me to process her card as a debit and how much higher as a credit. And yet I am not allowed to charge a processing fee. In other words, the dollar fountain drink costs me money instead of making the few cents I would normally make, since the consumer is making an offer to pay. Yes, I can refuse the service, but I don't understand what is going on here. When is the merchant allowed to make any kind of profit at all on the use of these credit and debit cards?" [email protected]