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Credit Card Companies Shuffling Stacked Deck

NEW YORK -- A controversial strategy hatched decades ago by Visa, the dominant payment network for credit and debit cards, has resulted in retailers paying twice as much in bank fees when a customer signs a debit card receipt compared to the fee when the customer punches in a four-digit code.
And according to an article in yesterday's New York Times, that strategy has largely benefited Visa and the nation's banks at the expense of merchants and, some say, consumers.
Payment networks like Visa and MasterCard set the fees merchants must pay the cardholders' banks. Since the payment networks are more interested in attracting banks that actually issue the cards than consumers who use them, setting higher fees means higher profits for the banks, even if merchants have to shift the higher cost to consumers, wrote Times reporter Andrew Martin.
According to Martin, Visa first enticed banks to embrace higher-priced signature debit cards and turned over the fees to banks as an incentive to issue more Visa cards. This was done as other card companies like MasterCard promoted the less-expensive PIN debit instead.

However, as debit cards became the preferred plastic in American wallets, Visa focused on PIN debit too -- increasing its market share not by lowering the fees that merchants pay, but often by increasing them, making its bank customers happier. Mastercard and others eventually followed suit, sometimes raising their fees even higher than Visa to woo bank customers back, according to the report.

This created a perverse system where the payment companies competed by raising prices rather than lowering them, said experts contacted by The Times.

More than a decade of litigation and antitrust investigations, including a settlement in 2003 in which Visa paid $2 billion to retailers, did nothing to change the debit landscape -- Visa has a 73 percent share of signature debit in the U.S. and a growing 42 percent share of the domestic PIN debit market, according to The Nilson Report, a credit industry newsletter.

Meanwhile, retailers pay the higher fees because refusing to accept Visa cards from consumers would result in lower sales.
Visa officials responded by saying its critics overlook the added convenience for consumers and the higher sales for merchants who accept the cards. The fees are "not a cost-based calculation, but a value-based calculation," Elizabeth Buse, Visa's global head of product, told The Times.
Retailers, though, point out that Visa keeps its system for setting fees shrouded in mystery. Said one blogger ("The Interchange Rip-Off"), "How, exactly, does a debit card now provide 'greater value' for merchants than it did in years past? Visa doesn't say. And of course we know exactly what the "value-based calculation" is that Buse is talking about: debit cards are cheaper for merchants than credit cards, and so long as there's a spread there, Visa and Mastercard will see it as an opportunity to hike prices."
The Retail Industry Leaders Association (RILA), a trade group representing some of the world's largest retailers, seized on the story to point out that "the credit card giant operates outside of market norms."
"Visa arbitrarily and unilaterally determines the 'value' of card acceptance which results in excessively high rates that hurt retailers small and large," said John Emling, RILA's senior vice president for government affairs. "For large retailers these fees stifle their ability to hire employees and reduce costs for consumers, for small retailers these fees can put them out of business."
RILA wants Congress to step in and reform the rate setting process to bring fairness and transparency to the system, according to Emling.
The Times also points out that Visa makes merchants pay an interchange fee each time a debit or credit card is swiped. The fees, roughly 1 to 3 percent of each purchase, are forwarded to the cardholder's bank to cover costs and promote the issuance of more Visa cards.
The banks have used interchange fees as a growing profit center and to pay for cardholder perks like rewards programs. Interchange revenue has increased to $45 billion today, from $20 billion in 2002, driven in part by the surge in debit card use.
The Justice Department "is investigating if rules imposed by payment networks, including Visa, on merchants regarding 'various payment forms' are anticompetitive, a spokeswoman told The Times. Bills have also been introduced in Congress to give merchants more ability to negotiate interchange fees. A class-action suit against Visa and MasterCard by a group of retailers is currently in federal court in Brooklyn. The suit seeks to change the system for setting interchange fees.
Robert Johnson, president of Consumers for Competitive Choice (C4CC), responded to The Times article the same day. The head of the group, which runs a Web site called The Credit Card Con said: "I am pleased that the New York Times is drawing attention to the issues of debit card steering and interchange fees, or swipe fees -- two of the many methods that Visa has been using to line their pockets on the backs of small businesses and consumers for far too long. …
"As the article points out, not only do signature debit purchases cost twice as much as PIN debit purchases for retailers, but PIN debit cards are less vulnerable to fraud making them a safer choice for card carrying customers. Yet Visa, MasterCard and others continue to steer customers toward signature debit purchases, even going so far as offering glittering prizes that customers only qualify for by making signature debit purchases. Why? I think that answer is clear… because at the end of the day it means higher profits for big banks and Visa and MasterCard."
Johnson clamed small business are willing to pay their fair share with regard to interchange fees, but believes Visa's actions have led to an escalation of more than 300 percent in interchange fees since 2001.
Read more on Visa's business model and the evolution of PIN cards in the Times article, and view a related video here.

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