Congress Begins to Investigate Interchange Fees
After repeated prompting, Congress began last week to delve into the growing controversy over credit and debit card interchange fees, a multi-billion dollar market that has vexed credit unions for the past few years.
Credit unions have been roiled by an increasing number of problems in their cards programs, including the escalating losses due to identity theft, the entry of new competitors into their markets, such as American Express and Discover, and the rising fees they pay on transactions. Those factors and others have prompted growing numbers of credit unions to sell off their cards programs and to exit the market.
The interchange fees, those charged to and by each of the participants in any card transactions (consumer, merchant and financial institution), have been especially troublesome in recent years, as card giants MasterCard Worldwide and VISA USA have sought to have their issuing banks and credit unions pay off expensive legal costs, including the $3-billion anti-trust settlement with Wal-Mart Stores and a broad group of retailers.
The Senate Judiciary Committee began its own investigation last week into the same question being heard in the courts: whether MasterCard and Visa, which control 80% of the $30-billion-a-year market for cards interchange, violate federal antitrust laws by fixing fees. "We're here to see if something ought to be done in this area," said Sen. Arlen Specter, R-Pa., the chairman of the judiciary panel.
Significant Issue For Credit Unions
The issue is a significant one for credit unions, which not only pay interchange fees, but also booked more than $1-billion worth of fees on their card transactions last year.
The Senate hearing comes at a difficult time for the Visa and MasterCard, as the European Union has also begun an investigation into allegations of price-fixing on European cards transactions by the two firms.
Representatives of several broad-based merchant groups told the senators last week that fees charged on cards transactions are eating up increasing portions of their revenue. They also claimed that neither card company will give them access to the full set of fee rules. William Douglass, owner of a chain of 15 convenience stores outside Dallas and head of the National Association of Convenience Stores' Government Relations Committee, told the panel that 60% of all gas sales at his stores are transacted by credit or debit card now. His stores reported average after-tax profit of $44,000 last year and paid almost the same amount-$42,000-in interchange fees. That's up 33% from the prior year. "And I can't even get a copy of the rates," Douglass told the senators.
Kathy Miller, who runs a mom-and-pop grocery in Elmore, Vt., had a more dire story to tell. She said her small country store is forced to accept cards for transactions, or else alienate customers. "The fees keep increasing for us and our profit margin keeps going down," said Miller, whose tiny grocery store paid $4,200 in interchange fees last year.
The growing fees, said Miller, take up as much as a third of the 30 cents her stores earn on a bottle of water from each customer. "If they buy a candy bar," said a tearful Miller, "I might as well just give the candy bar to them. It just doesn't pay."
Representatives from the two card giants were adamant that their market share does not equate to price-fixing power on fees. Joshua Floum, the new general counsel for Visa, insisted that broad competition in the payments market, including Visa and MasterCard, as well as American Express, Discover, First Data, Debitman, PayPal, Google, Checkout, and a growing number of entries, prevents the two card giants from fixing prices. "There's plenty of choices," said Floum.
"The payments industry," asserted Joshua Peirez, general counsel for MasterCard, "is extremely competitive." In addition to competing with cash, checks, money orders, online and various other payments methods, MasterCard competes with Visa for the business of merchants, banks, credit unions and consumers, he insisted.
The cards executives insisted that in dragging Congress into the fight, the merchants are hoping to get the federal government to set rates, something that is happening in other countries, including Australia and Canada.
Two Views On Australian Scenario
But the two sides differed greatly on the effects of the recently enacted fee structure in Australia. The card company executives insisted that rate-setting in Australia has resulted in higher fees and higher interest payments for consumers on their monthly statements.
Stephen Cannon, an attorney with the Washington firm Constantine Cannon who represented the merchants in the Wal-Mart case, disputed the conclusion that consumers have not benefited from the new system in Australia, where the government now sets interchange fees. Interchange fees by Australian participants in the system remain a third of those charged in the U.S., said Cannon. And the government caps on fees have driven bank and credit union issuers into a competitive frenzy on interest rates to attract new customers.
Cannon, who served as chief anti-trust counsel to the Senate Judiciary Committee in the 1980s and 1990s, told the senators the merchants groups are not asking for government fee-setting. "All our merchants have asked for is for Congress to look at the problems and review the situation," he stated.