"There really doesn't seem to be any legislative approach to this problem other than price controls and I am not sure anyone is really interested in those," Conyers noted.

In addition, lawmakers' ongoing frustration with the practices of credit card issuers toward consumers kept bleeding over into the interchange issue, with some legislators expressing a willingness to side with the merchants on interchange because of what they believe are the credit card issuer's anti-consumer practices.

"We know what they do on interest rates and when someone doesn't pay them right on time so I would not be surprised to hear that they were operating

unfairly on this interchange," exclaimed Maxine Waters (D-Calif.).

Merchants Complaints

In their broadest terms the merchants, represented by the Merchant Payment Coalition and an executive from a 95-store grocery store chain who also spoke for the Food Marketing Institute, complained that the cost of interchange was too high, that it was set in a non-transparent manner and that it was not really open to competition.

"Unlike other costs of my business such as insurance or the service which picks up my trash," said Steven Smith, president and CEO for K-VA-T Food Stores, Inc. and chairman for the Food Marketing Institute. "I can't sit down with a number of different providers and negotiate a substantially more competitive price on interchange."

This served to illustrate and echo complaints from Mallory Duncan, general counsel for the National Retail Federation and the chairman of the Merchants Payments Coalition.

"The collective setting of interchange fees by Visa and MasterCard represents an on-going antitrust violation, and it costs merchants and their customers tens of billions of dollars annually," Duncan said.

"This market is broken. It needs transparency and genuine competition. Currently, the only semblance of competition is the battle between Visa and MasterCard to get more banks to issue their cards. And how do they do that? By promising the banks they'll extract more interchange from consumers than the other guy. This is the only market I know of where the parties compete to raise prices rather than to lower them."

Card Brands Response

The card brands' perspective was represented by the Timothy Muris, former chairman of the Federal Trade Commission and current George Mason University School of Law Professor. Muris took some hard questions from some of the Task Force members over whether Visa was actually paying him to appear. Muris said he was not being paid to testify, did not lobby full time and only testified on behalf of causes he believed in. The card brands had such a cause, he said.

"Although merchants attempt to analogize interchange to a cartel fixing prices, they are wrong," Muris argued, noting that easing true cartel pricing leads to lower prices, higher output, and greater innovation. By contrast, the end of interchange instead would lead to chaos, a decrease in available credit, a decline in the number of outlets that accept payment cards, and less innovation, he argued, adding: The merchants understand the facts. They do not want an end to interchange. They simply want interchange rates to be lowered. But this is not an antitrust remedy, he said.

Muris appeared to acknowledge that the current interchange system is not a perfect solution, calling it an "accident of history" that he said developed because of the legal and regulatory structure in place when Bank of America first started to issue credit cards. But none of the legislators asked Muris how, if it could all have been done again, how he would structure the system differently.

Part of the problem now, Muris told the lawmakers, is that interchange has become the only really efficient system for administering the massive credit card payment industry.

"The Visa and MasterCard systems would not work without some kind of interchange mechanism", Muris said.

"Each of the two systems has approximately 6,000 card issuers and several hundred merchant banks. To replicate the existing interchange systems through individual contracts, participants in the two systems would need to negotiate more than one million contracts," he added.

He also noted that Visa has begun to use interchange as a draw to counter the data security breach problem. The card brand has announced that merchants eligible for lower, tiered interchange would need to comply with the standards set by the PCI Security Standards Council, to continue to enjoy the best available rates on their tiered volume, Muris observed. "Adherence to this PCI standard would reduce security breaches," he said.

Significantly, the hearing did not touch on the experience of Australia, which has put into place some of the sorts of measures the merchants have floated in the past and which Visa has attacked strongly.

"The interchange debate is not about antitrust issues; it is about business," argued Rosetta Jones, vice president with Visa USA in a pre-hearing statement. "Lobbyists representing some national retailers and trade associations are asking Congress to lower retailers' costs of doing business by imposing price controls and by granting retailers the ability to impose consumer check out fees on their customers.

"This cost-shift maneuver has already been tried in Australia where both mandated price controls and check out fees have resulted in increased costs and fewer choices for cardholders. A bad policy decision in Australia clearly led to consumer harm, which we hope to avoid here in the U.S."

About the only possible area of regulatory relief for the merchants that appeared to come out of the hearing was a possible modification of the card brands' honor all cards rule. Currently, if a merchant says that it will accept Visa credit cards, it must accept all Visa credit cards, both those which carry more of an interchange charge and those that carry less. Merchants pressed to be able to decline the higher end Visa cards, such as the Signature card, if they chose even though Muris maintained that allowing them to do so would wind up hurting consumers by making it more complicated to use their cards.

"Currently if I see a Visa logo I know that any of the three of four Visa branded cards I might have in my wallet will be accepted," Muris said. "If merchants are allowed to pick and choose which cards they will

accept my confidence and ease of use as a consumer is diminished."

Where From Here?

It was unclear where the issue will head next in the legislative arena. The hearing did not appear to generate any clear-cut consensus on what to do about interchange, if anything, and it's unclear whether the Judiciary Committee is going to be interested in backing a bill on the topic.

But it seems clear that some degree of pressure on Congress is going to continue as it has begun to generate the sorts of horror stories among retailers that often attract Congressional interest.

In a prepared statement, the NRF highlighted the case of Balliet's, a women's clothing store in Oklahoma City where interchange fees last year rose to more than $80,000, topping the $60,000 spent on employee health insurance.

"In order to pay Visa and MasterCard in 2007, Balliet's was forced to reduce its health insurance contribution from 70% to the 50% minimum required by its insurer," the NRF said. "In 2008, the company may be forced to drop coverage altogether if interchange continues to rise."

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