Interchange Hearing Opens Debate

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Interchange Hearing Opens Debate

By Mehgan Belanger - 10/08/2009
NEW YORK -- The House Financial Services Committee heard from both retailers and banks yesterday in a hearing dedicated to credit card interchange fees and the Credit Card Interchange Fees Act, H.R. 2382.

During the hearing, committee Chairman Barney Frank (D-Mass.) called the issue of the fees "more complex" than new credit card legislation going into effect in February that put strict rules on credit card companies' rates and increases. Meanwhile, Rep. Luis Gutierrez (D., Ill.), said "swipe fees" were "outrageous."

One of the bill's sponsors, Rep. Bill Shuster (R-Pa.), detailed the purposes of the bill in his prepared statement. He said: "This legislation focuses heavily on transparency in the hopes of determining whether credit card companies are pursuing anti-competitive practices. It makes Interchange Fees subject to full disclosure and terms and conditions set by credit card companies easily accessible by consumers. It would also prohibit profits from Interchange Fees from being used to subsidize credit card rewards programs. Small businesses, and ultimately consumers, should not be financing perks of luxury card holders."

Shuster also illustrated the impact interchange fees have on businesses by giving as an example the convenience store chain Sheetz Inc., which is headquartered in Shuster's congressional district. With 363 stores in six states, Sheetz paid twice as much in interchange fees as they took in net income after tax last year, he said., adding its second largest expense, after payroll, is the interchange fee.

"This means that for Sheetz, the interchange fee eclipses the company's cost of rent for their 363 stores; and the interchange fee is one and a half times the cost of providing health care to their nearly 13,000 employees," Shuster said. "Sheetz is not alone. Sadly, it is joined by thousands of businesses across the country who are being unfairly penalized through interchange fees. Something must be done and I believe H.R. 2382 is the right vehicle for change."

In prepared statements, merchants and associations testified on the dramatic impact interchange fees have on business.

"The collective setting of interchange fees by Visa and MasterCard represents an on-going antitrust violation and it costs merchants and their customers — that is, America's consumers — tens of billions of dollars annually," Mallory Duncan, senior vice president and general counsel of the National Retail Federation (NRF), said in a statement prepared for the hearing.

Duncan also addressed credit card companies' defensive argument that interchange helps fund reward programs for consumers, among other things. He said: "So called 'rewards' are a key part of the problem. It bears noting that the rewards cardholders receive are generally worth far less than the interchange fees they pay."

He also took on credit card companies' argument that retailers have the option to not accept cards if they do not want to pay the fees. Beyond the fact that is it not a practical alternative due to the market power of Visa and MasterCard, Visa "adds insult to injury," by requiring merchants to accept cards at all of their retail locations if they want to accept cards at any location, he explained.

"If a business wanted to experiment to see if they could survive without taking cards, it would only make sense to try that as a pilot at one location before taking the leap for multiple locations," he said. "But Visa makes this an all-or-nothing proposition for merchants because it knows that will keep the largest number with no choice but to accept cards -- and accept the ever-escalating fees."

Duncan also addressed in detail what he called "unfair rules" imposed on merchants by the credit card companies and relating to interchange fees. One of them, the "non-discrimination" rule prohibits any merchant in the United States from giving its customers a discount if the customers use a general purpose card with has lower fees, according to Duncan, who called it "a remarkably anticompetitive standard," and said: "Imagine if Coca-Cola were to tell grocery stores that they could be fined or have their right to sell Coke products revoked if they charged people less for Pepsi than for Coke. That is the equivalent of what Visa and MasterCard do -- and they both do it!"

Similarly, Duncan called a set of rules prohibiting merchants from offering discounts for cash, check or debit payments "a straight jacket."

"Visa and MasterCard deny that this occurs, but their member banks have long advised my members and other merchants that they will be fined if they do not comply with complex and burdensome requirements for marking prices individually and displaying credit card prices more prominently than cash prices in order to provide a discount," he said.

Another one of the unfair rules that Duncan addressed related directly to convenience store and fuel retailers. Both Visa and MasterCard set a limit of $75 on gasoline purchases, and in some instances will refuse to give the merchant selling the gasoline the amount of that transaction above $75 -- even if the cardholder does not dispute the charge, he said, adding: "This is outrageous and it effectively amounts to stealing the merchant's money."

Meanwhile, the card issuing companies defended their practices and provided arguments opposing the bill.

Mark Caverly, executive vice president of the Local Government Federal Credit Union (LGFCU) of Raleigh, N.C., testified on behalf of the Credit Union National Association and the Electronic Payments Coalition (EPC).

"The merchants like to describe interchange as a fee on consumers; however, interchange represents the merchants' assumption of their fair share of the financial responsibility for the card payment system," he said. "Merchants receive many benefits as a result of their participation in the payment system."

H.R. 2382 would result in cost-shifting from merchants to consumers, as well as increased fees for consumers to obtain debit and credit cards, according to Caverly. "The strongest evidence of this is the fact that the merchants are not willing to warrant that any savings they realize from a proposed reduction in their interchange expense would be passed on to consumers in the form of lower prices," he said.

Caverly also addressed the legality of merchants offering cash discounts. "It is my understanding that merchants believe the payment card networks have interfered with merchants' legitimate rights to offer cash discounts. To do so would be illegal under federal law. Despite merchants' complaints, I am not aware of any serious allegation of such a violation, nor am I aware of any law enforcement action in this regard," he said.

In addition, Caverly argued the abolition of the "honor all cards" rule under the proposal would devalue smaller financial institutions' cards if they were not accepted by major retailers.

"This proposed change would make it impossible for my credit union to provide a competitive card program to consumers, which would result in the inability to attract or retain members," he said.

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