US politicians and merchant groups, not content with
bringing credit card billing practices under the spotlight, are now
urging regulators to scrutinise interchange. But they are coming up
against strong opposition from banking groups who argue that
interchange is necessary. Charles Davis reports.

 Chris Dodd

Amid the clamour for greater regulation of the US cards industry,
the spectre of interchange restrictions looms as the next great

The credit card billing practices legislation, otherwise known as
the Credit Card Accountability, Responsibility and Disclosure Act
(CARD Act), currently calls for a General Accounting Office study
of interchange, and despite the fact that its Senate handler has
said that interchange is off the table, the industry is bracing for
a fight later in the year if other legislation surfaces.

Senate Banking Chairman Christopher Dodd said he has been working
with Republican Banking Committee ranking member Richard Shelby to
get a compromise on the bill, but added that he was prepared to
take it to the floor if a consensus could not be reached, allowing
for an up-or-down amendment vote on the disputed items.

Industry and merchants go head to head

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Dodd said that the bill would not contain any strong provisions to
regulate interchange fees, but industry lobbyists are working
overtime, fearing a last-ditch effort by merchant groups over

Their fears are not ungrounded. After failing to get traction last
year in the House, lobbyists for the Merchant Payments Coalition,
whose members include the National Grocers Association and two
powerful retail groups that are set to merge, the National Retail
Federation and the Retail Industry Leaders Association, have been
blanketing Capitol Hill trying to pressure lawmakers to add
interchange regulations to the credit card bill.

The Electronic Payments Coalition has answered the merchants with a
massive lobbying push of its own, saying the merchants are simply
“venue shopping” to get the provision added to any potential
legislative vehicle.

The opposing groups spent almost exactly the same amount on federal
lobbying during the first quarter: The merchants racked up $245,000
and the banks $250,000, according to Senate lobby disclosure

Last year the merchants’ coalition lobbied on a bill before the
House Judiciary Committee that would have given merchants the
ability to negotiate fees with banks under the guidance of the
Justice Department.

The merchants also tried unsuccessfully to get the negotiation
element in the House version of the credit card bill earlier this

Argument heats up over the risk factor

Card industry and banking officials dismiss the merchants’
complaints as misguided, arguing that they must front the risk and
cost of providing credit to consumers. In increasingly heated
rhetoric, the two sides have never seemed further apart.

“The retailers’ continued claims that their position on interchange
fees is pro-consumer is a poorly disguised shell game,” said Dan
Berger, the National Association of Federal Credit Union’s senior
vice-president of government affairs. “They are simply seeking to
increase their own bottom line and not looking out for

Banks and their allies proved their legislative staying power
despite the populist rage directed their way in early May, when
they rallied support to defeat a key part of President Barack
Obama’s housing foreclosure mitigation plan. That plan, known as
“cram down”, would have allowed bankruptcy judges to write down the
terms of some primary home mortgages so that struggling owners
could stay in their homes.

Still, the same week, the House produced a surprisingly bipartisan
House vote, 357-70, in favour of the consumer protection bill for
credit card holders.

Supporters want to get that bill to President Obama by the Memorial
Day holiday (25 May), but acknowledged the House passage was just
one step, and credit card industry interests could weaken
restrictions during the Senate proceedings. If the bill becomes
law, the new House provisions would not take effect for a year,
outside of a requirement where customers get 45 days notice before
interest rate hikes, which would go into effect in 90 days.

House opponents tried to slow the bill’s pace with amendments that
would have given credit card issuers the opportunity to raise rates
within the new restrictions, but were steamrolled by that
attention-getting bipartisan majority. In a political season in
which almost no bill receives bipartisan support, credit cards seem
to be something both parties can agree to bash.

Meanwhile, it is worth remembering that a merchant lawsuit
continuing to wind its way slowly through the courts has
resurrected the challenge to the initial public offerings by Visa
and MasterCard.

At the end of January the merchants filed a revised complaint
designed at least in part to respond to the presiding judge’s
ruling dismissing the initial complaint they had filed challenging
the IPOs.

The merchants allege that Visa and MasterCard structured their IPOs
to create a superficial veneer of independence from the banks while
giving them a veto over any fundamental change to their governance.
This structure, the merchants contend, violates the anti-trust laws
by perpetuating the interchange system that has existed for

This much seems true: whether legally, legislatively or through the
regulatory powers of the Federal Reserve, interchange is under fire
from so many sides that perhaps the best argument for the industry
is the economic one – that now is not the time for a change, given
the perilous state of the banking industry. However, that is not
much an argument, least of all to a judge or a member of