Merchants in the US are stepping up the
pressure against issuers and networks over interchange, and new
proposed legislation, if passed, could give merchants a seat at the
table during interchange level negotiations. Truong Mellor
A new bill in the US is aiming to eradicate
‘hidden’ interchange fees charged by card issuers that cost the
consumer around $40 billion annually. The introduction of the
Credit Card Fair Fee Act into Congress is the outcome of a hearing
held in July 2007 where trade association the National Retail
Federation (NRF) senior-vice president Mallory Duncan, testifying
on behalf of the NRF and the pressure group the Merchants Payments
Coalition (MPC), argued that interchange practices violate federal
antitrust law.
The bill, which is being introduced by the US
House Judiciary Committee, follows the recent ruling by the
European Commission against MasterCard over interchange fees
charged on cross-border card transactions (see CI 393).
“Merchants are forced to deal within this
system because it is simply not an option to refuse to accept Visa
or MasterCard from their customers,” said John Conyers, chairman of
the US House Judiciary Committee. “They are presented with
take-it-or-leave-it options and are not part of the process by
which the fees are set. Moreover, the card systems operate pursuant
to comprehensive operating rules approved by the associations’
member-controlled boards, but these operating rules are not
accessible by the merchants.”

Increasing interchange fees

It is estimated that Visa and MasterCard racked up $42 billion in
interchange fees in 2007 in the US alone, a 17 percent increase
from the previous year and a 150 percent increase since 2001.
Interchange fees make up 90 percent of transaction fees charged to
merchants at present, according to merchant groups, who say that
the card networks benefit from consumers being unaware of what
interchange is. According to Conyers, Visa and MasterCard do not
disclose the fee on monthly statements and effectively keep
merchants from disclosing it on receipts. He also alleged that Visa
and MasterCard require merchants to pass the fees on to consumers
by requiring them to be included in the advertised price of items,
making cash discounts difficult. Conyers told the Committee that
these fees are eventually passed on to all consumers in the form of
higher prices for goods and services, whether the consumers
purchase these items by credit card, cheque or cash.

Unsurprisingly, retail groups in the US have
been jubilant about the news. “With the rapidly increasing use of
plastic, credit card companies and their banks are seeing a
windfall that is costing US consumers tens of billions of dollars
each year,” said Duncan. “These are fees that most consumers don’t
even know they’re paying because Visa, MasterCard have tried to
keep them secret. The introduction of this legislation marks the
beginning of the end of credit card company rip-offs.”
“We can now work toward a solution where
economies of scale, innovation and competition – the forces that
drive free enterprise – decide credit card processing fees,” said
Tim Hammonds, president and CEO of the Food Marketing Institute and
an MPC member.
The bill would require major card issuers to
negotiate with merchants in order to reach a voluntary agreement on
credit card terms and conditions. If an agreement cannot be
reached, both sides would be required to submit to binding
arbitration by a three-judge panel appointed by the Department of
Justice and Federal Trade Commission. According to Conyers, no
other fees, terms or conditions may be imposed on the

MasterCard hits back

MasterCard has hit out at the new legislation, and in a statement
released to the press announced that “there is no need for
government intervention, and that it would be inappropriate for the
US government to set prices and negotiate the terms of contracts
for private commercial entities. Such policy decisions in the past
have proven to be unworkable, unpopular and detrimental to the free
market economy.”

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The card network went on to indicate that the
widely held perception that price controls relating to interchange
fees would result in savings for the consumer is mistaken: “To the
contrary, we believe such moves negatively impact consumer
According to Francesco Burelli, cards and
payment specialist at management consultancy AT Kearney, the
possibility of merchants being party to interchange fee
negotiations has the potential to cause significant disruption to
existing business models. “All of a sudden, a third party
[merchants] may be involved in the process, deciding which cost
categories are acceptable, and which ones are too high or too low
or arbitrarily deeming the interchange rates as too high. If that
is the case merchants will effectively be looking into the cost
structure of the issuing industry,” he told CI.
“Apart from being a huge power shift, it will
also transform interchange from being calculated on an
activity-based costing basis aimed at maximising cards uptake and
acceptance, to more closely resembling a bilateral negotiation
driven by merchants. There are questions about how all this will
work. Will there be a representative of the merchant industry
negotiating with the banking system or the schemes? Is this a
process that will be done on a merchant-by-merchant basis or at
domestic level? How will inter- and extra-regional interchange
rates work? What voice will small merchants have? It is easy to
understand how this sort of change may result in confusion.
“There is a strong possibility of this
legislation being passed in some form, especially given the amount
of lobbying that is going on in the US and the amount of pressure
and merchant activity around interchange. This is making the
overall interchange issue theme even more uncertain and disruptive
for the industry as regulators tend to copy each other, especially
on initiatives that go against the banking system which is seen as
anti-consumer and anti-merchant.
“The cards payment industry generally expects
interchange rates to fall but radical changes in the way the
interchange rates are set could be even more damaging. In the
medium term there may be also indirect consequences outside the
issuing business, especially given the current economic