CSNews Exclusive: New Proposal Links Interchange Reform with Disaster Relief

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CSNews Exclusive: New Proposal Links Interchange Reform with Disaster Relief

By Don Longo, Convenience Store News - 10/06/2009
WASHINGTON, D.C. -- The CEO of a biofuels manufacturing company whose Louisiana facilities were devastated by hurricanes Katrina and Rita in 2005 suggested to both the White House and Congress that the U.S. credit card interchange fees be brought in line with the rest of the world and that a portion of the new fees be allocated to fund a National Disaster Trust Fund.

Brian J. Donovan, an engineer, attorney and CEO of Renergie Inc., a company formed to construct and operate 10 advanced biofuels facilities in Louisiana, recently wrote to President Barack Obama, members of the Senate Committee on Banking, Housing and Urban Affairs, and members of the House Financial Services Committee outlining the critical need for comprehensive reform of the U.S. credit card industry.

The House Financial Services Committee is scheduled to hold a full committee hearing on credit card reform Thursday, Oct. 8.

In his letter, Donovan cited how the U.S. credit card business model is unfair to merchants and results in a "hidden tax" on consumers.

"I became interested in this topic during a recent business trip to New Orleans," Donovan told CSNews Online. "I was pursuing GO Zone bond financing on behalf of Renergie for the purpose of constructing a small advanced biofuel manufacturing facility in New Orleans. I was not successful due to the tight credit market and the flawed structuring of GO Zone bond financing."

In his letter, Donovan pointed out that New Orleans will lose approximately $1 billion in allocated GO Zone bond financing at the end of this year. "I find this to be unacceptable," he said. "I happened to read, purely by luck, an article on the Credit Card Act of 2009. The result is credit card reform wherein U.S. interchange fees would be brought in line with the rest of the world, and 0.3 percent would be allocated to fund a Natural Disaster Trust Fund. Interchange fees would no longer be a hidden tax."

Donovan hopes to get the word out to more merchants and consumers about the unfairness of transaction fees and the need to establish a natural disaster trust fund.

In his letter, Donovan wrote: "The failure to regulate the U.S. credit card industry in a comprehensive manner is a threat to our nation's economy." He said the Credit Card Act of 2009, which provides added protections to consumers from certain credit card industry practices, fails to address the key issues confronting merchants -- merchant restraints and the interchange fee.

"Merchant restraints prevent merchants from informing consumers on the costs of payment and limit the ability of merchants to direct consumers to the safest, lowest cost, and most efficient forms of payment," he wrote. "Lacking a positive pro-competitive
justification, merchant restraints should be banned as antitrust violations."

In addition, "Interchange fees amount to a hidden tax on consumers. All consumers, even those who pay with cash and checks, pay more at the store and more at the pump because these interchange fees are passed on in the overall cost of goods sold."

Donovan claims the average interchange fee in the U.S. is seven times the regulated interchange fee set by Visa and MasterCard in countries throughout the rest of the world. Among his reform recommendations is standardization of credit cardholder agreement terms and simplified pricing that will allow for the creation of a transparent and competitive credit card market.

"Using 2008 figures, if the interchange fee charged by credit card issuers was decreased [via comprehensive credit card reform legislation] from the current 2.10 percent to 0.60 percent, that would result in an annual savings of approximately $34.3 billion for U.S. merchants and consumers. Credit card issuers could retain 0.3 percent as a processing fee, the remaining 0.3 percent could be a 'tax' used to fund a Natural Disaster Tax Fund [NDTF]. In 2008, this would have generated $6.86 billion in funding for a NDTF."

Download and read Donovan's complete letter.

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