House panel studies changes to credit card processing fees

A subcommittee of the U.S. House Judiciary Committee recently began considering legislation that would control the rising interchange fees credit card companies charge retailers. The Credit Card Fair Fee Act of 2008 (H.R. 5546) was introduced in March and sent to the House Judiciary Committee Antitrust Task Force for hearings that began in May.

The proposed legislation would require credit card companies with “substantial market power” (like Visa and Mastercard with a combined market share of more than 80%) to negotiate those fees with merchants, putting a stop to the credit card companies’ ability to collectively set non-negotiable fees. In the event the credit card companies and merchants couldn’t come to an agreement, both sides would be required to submit their final offers to binding arbitration by a three-judge panel appointed by the Department of Justice and Federal Trade Commission.

The bill has the backing of the Merchants Payments Coalition, representing the support of about 2.7 million U.S. retailers. The MPC’s Web site, unfaircreditcardfees.com, has more information including updates on the bill’s status, a list of supporters and links to the email addresses of the elected officials who will eventually be voting on the bill.

One of MPC’s members, the National Retail Federation, estimates that Visa and Mastercard collected about $42 billion in interchange fees in 2007, an amount that has been steadily increasing and could top $48 billion in 2008.

The NRF projects that a good chunk of those interchange fees are eventually passed on to the consumer, costing the average U.S. family more than $400 this year, up from $378 in 2007, and nearly triple the $159 paid in 2001, the year the NRF began tracking interchange.

Depending on who you talk to, the interchange fees average somewhere between 1.75% and 2% of the transaction value. Daniel Ballon and Lawrence McQuillan of the Pacific Research Institute, in an op-ed piece for the Washington Examiner (May 26, 2008) put the average at 1.75%. They also said that these fees are what enable banks to offer a variety of free cards with generous rewards to consumers; that credit card companies return between 1% and 5% of the purchase price back to about 85% of card users in the form of rewards programs; and that passage of the Credit Card Free Act “would, by taking money away from credit providers and handing it to merchants, increase the profits of big retailers and impose higher costs on credit card users.” According to Ballon and McQuillan, this would result in “fewer cards, higher annual fees, rising interest rates and the end of rewards programs.”

However, a 2006 report by Chicago’s Diamond Management and Technology Consultants found that only 13% of the collected interchange fees is needed for actual transaction processing costs, with most of the rest going to rewards programs and profits, which means, after deducting for processing costs and consumer rewards, that leaves Visa and Mastercard with a profit of about 80% of last year’s $42 billion collections.

One of the bill’s banking opponents, Utah Bankers Association President Howard Headlee, told a Salt Lake Tribune reporter that the fees are reasonable because the banks assume the risks of credit card fraud.

Opposition to the bill also comes from the Electronic Payments Coalition, an organization of payment card networks, financial services companies and financial services trade associations that, in a May 15 press release, described the legislation as “ill-conceived” and “nothing short of price controls.”

The EPC also said the proposed three-judge panel “of politically-appointed bureaucrats who would 'determine rates and fees’ for this highly complex and vast system could never replicate the delicate balance currently established by the free market. Such policy would bring harm to consumers, to the community banks and credit unions that receive interchange revenue, and to the viability of the worldwide electronic payments system.” The Coalition is also concerned that “merchants would also feel the pain of such an economic disaster,” merchants they describe as “the very entities that are seeking price controls for their own financial gain.”