Merchants are being hit with excessive fees set by the collective action of MasterCard and Visa, which hold approximately 80 percent of the credit and debit card market share. These interchange fees, which are imposed by banks to process the charges submitted by merchants who accept Visa and MasterCard credit and debit cards, amount to a hidden tax on both merchants and consumers.
While the competition authorities of some major U.S. trading partners have found the interchange fee process to constitute unlawful price fixing, the United States has addressed prices and rules imposed by card joint ventures only through piecemeal antitrust litigation brought by the U.S. Department of Justice (DOJ), merchants and consumers.
Convincing the courts, Congress or regulators to determine that the card associations' collective setting of interchange fees is unlawful under federal antitrust law represents just the first step. The overriding issue is the appropriate form of relief against future violations, and many options have been vetted. The Merchants Payments Coalition (MPC), of which RILA is a member, is advancing a legislative remedy framed around the arbitration process used in the music licensing industry.
House: On June 4, Judiciary Committee Chairman John Conyers (D-MI) and Rep. Bill Shuster (R-PA) re-introduced the Credit Card Fair Fee Act (H.R. 2695). A similar version passed out of the Judiciary Committee in 2008 with a bipartisan vote by a margin of 19-16. As written, the legislation would: 1) grant retailers limited antitrust immunity for negotiation of access rates and terms with banks and card issuers, 2) direct the Attorney General to monitor negotiations and compile information from retailers, banks, and card issuers on the real costs associated with electronic payment systems, 3) limit the scope of the bill by zeroing in on Visa and MasterCard by setting a market share threshold and thereby exempting American Express and Discover, and 4) grant small banks and credit unions the opportunity to opt out of negotiations between merchants and banks. On May 13, competing legislation was introduced by Reps. Peter Welch (D-VT) and Bill Shuster (R-PA) in the form of the Credit Card Interchange Fees Act of 2009 (H.R. 2382). The legislation would: 1) empower the Federal Trade Commission and the Federal Reserve to prescribe regulations to ensure that interchange rates and the accompanying rules and conditions are transparent and are not anti-competitive, 2) require that interchange rates, terms, and conditions be made available to all businesses participating in the electronic payment network, 3) and prohibit additional fees to subsidize rewards programs while requiring the disclosure of interchange rates to consumers. Senate: On June 10, Senate Majority Whip Richard Durbin (D-IL) introduced legislation (the Credit Card Fair Fee Act, S. 1212) similar to the Conyers-Shuster bill. The Durbin bill deviates slightly from the Conyers-Shuster bill in that while it would continue to grant retailers limited antitrust immunity for negotiation of access rates and terms with banks and card issuers, if no agreement can be reached a three-judge arbitration panel would review the findings and rule on a final outcome. In addition, the Durbin bill would cover any card company with more than a 10 percent market share, thereby covering Visa, MasterCard, American Express and Discover.
Sens. Durbin and Kit Bond (R-MO) tried to offer an amendment to the recently enacted Credit CARD Act (P. L. 111-24) that would have relaxed rules that currently restrict retailers from offering discounts for certain forms of payments. The amendment was ultimately not brought up for a vote; however, the sponsors have pledged to look for other legislative vehicles to move the amendment. Separately, the Credit CARD Act included a mandate requiring the Government Accountability Office (GAO) to conduct a study on interchange fees and report back to Congress within six months with recommendations for legislative or administrative actions that may be appropriate. Several RILA members have met with the GAO to offer policy recommendations and the study is expected to address:
RILA will retain its leadership role in these efforts as well as inform and engage RILA member companies of the latest happenings through its Interchange Fees Working Group. RILA will also look for other opportunities to engage the U.S. Government on interchange fees, including a report mandated in unrelated credit card legislation directing the Government Accountability Office (GAO) to report back to Congress on interchange fees by December of this year, and an expected wholesale reform of the financial services sector later this fall driven by the Obama administration and Congress.
The MPC and RILA are pursuing a variety of avenues to help U.S. merchants obtain more reasonable interchange fees. Among other steps, the coalition is examining reforms that have been recently adopted or are under consideration around the globe because rates in countries where reforms have been implemented are drastically lower than in the U.S. In addition, the coalition is educating members of Congress and their staffs, as well as antitrust enforcers, financial regulators and the media, about this issue in an effort to advance workable policy solutions.
Unlike cash or check payments, merchants do not receive the full value of payment transactions that customers make with credit and debit cards. Rather, the credit or debit card issuing bank subtracts a “merchant discount” (e.g., 2 percent) from the amounts owed to the merchant for the privilege of accepting electronic payment from customers. While some of this discount reimburses the acquiring bank for services provided to the merchant, most of the discount reflects an interchange fee, charged by the issuing bank, which is subsequently passed through to the merchant.
Interchange fees do not reimburse the card associations themselves; rather, interchange fees are payments from one group of competing banks (acquirers) to another (overlapping) group of competing banks (card issuers) at a price collectively set by these competitors through their control over the associations. The MPC considers this to be price fixing, and its view is shared by the competition authorities of U.S. trading partners.
This interchange fee on merchants is used by card issuers to subsidize their marketing efforts and bolster their rapidly expanding bottom lines, among other things. In particular, the use of interchange fees has allowed card companies to issue lines of credit without properly assessing risk. This guaranteed source of revenue has fueled the proliferation of cards to the point where the average consumer has nine cards today. In addition, the use of interchange fees provides cardholders – and especially affluent cardholders – with points, miles, concierge services and cash-back features and thus adds a substantial burden on the cost of goods and services that Americans of all income levels buy. According to industry statistics, U.S. interchange fees paid to Visa and MasterCard have increased by at least 120 percent since 2001.
On April 24, 2006, numerous merchants filed a consolidated complaint in class action litigation challenging collectively set interchange fees, but the ultimate resolution of this litigation could be years away. While the class action lawsuit remains in a lengthy discovery phase, Congress has taken increased notice of the exorbitant fees that credit card companies are charging merchants.
For more information or to sign up for RILA’s Interchange Fees Working Group alerts, please contact John Emling, senior vice president of government affairs, at john.emling@rila.org, or Andrew Szente, director of government affairs, at andrew.szente@rila.org.