WASHINGTON –Lawmakers, backed by consumer groups and retailers, called yesterday for passage of a bill that would open the interchange market to competition, allow retailers to reject cards with high fees–like rewards cards–and authorize the Federal Trade Commission to review MasterCard and Visa rules for fairness and competitiveness.
Representatives of CUNA and NAFCU told the House Financial Services Committee during a hearing last week the latest bid to regulate the $50 billion-a-year market for interchange could backfire by profiting retailers without necessarily benefitting consumers. A lowering in interchange fee income for credit unions and banks would likely result in higher fees charged for other services as those institutions seek to make up the lost revenue, Mark Caverly, executive vice president of Local Government FCU, told the lawmakers.
"If merchants do not pay their fair share for the benefits they receive from the card payment system (as compared to their operating losses with cash and checks), consumers will either pay more for cards and banking services or, even worse, have fewer options for cards," said the credit union executive, who was testifying on behalf of CUNA and the Electronic Payments Coalition, which also represents NAFCU, the American Bankers Association, MasterCard and Visa.
Anthony Demangone, director of regulatory compliance for NAFCU, suggested the legislative initiative could result in the FTC setting caps on interchange fees. "Ultimately, any cap on interchange fees will be passed on from financial institutions to consumers in the form of higher interest rates, and lower yields on investment products," the NAFCU exec told the panel.
But the effort to regulate interchange appears to have growing bipartisan support among lawmakers. Republican Rep. Bill Shuster of Pennsylvania, a co-sponsor of the interchange bill, said the measure is needed to bring transparency and fairness to the market.
Democrat Peter Welch of Vermont, the chief sponsor of the bill, said the measure would do four main things: require card companies to disclose the interchange fee rates; allow retailers to advertise discounts for use of cash; allow retailers to reject high-fee rewards cards for which they do not receive any added benefit; and allow the government to set rules for the market. Welch said his bill is aimed at the big banks who dominate the market for interchange. He said just ten banks earn 80% of all interchange.
But Local Government FCU’s Caverly said the bill would harm smaller card issuers, like credit unions, which rely on income from interchange to offset costs of their cards programs. "Interchange is important to credit unions and their members because it helps support the card program," he said. "It helps to cover some of the costs associated with the risk of non-payment that the card issuers assume, the risk of fraud and other data breaches that occur at merchants, and the administrative costs of the program."
The bill would also have unintended consequences, said Caverly. For example, it would empower large banks with exclusive arrangements with retailers to exclude other cards, like those issued by credit unions and other competitors.
The effort to regulate interchange is being driven by the powerful retailing lobby, which asserts that the rules and rates are unilaterally set by MasterCard and Visa, which are controlled by credit unions and banks.
Mallory Duncan, general counsel for the National Retail Federation, told lawmakers the two card companies are able to set rates because they control an estimated 85% of the credit card market. Duncan asserted the two companies amount to cartels, fixing prices and practices on card usage.
Representatives from some consumer groups spoke in favor of the bill. Edmund Mierzwinski, consumer program director for U.S. PIRG, said the bill addresses anti-competitive practices in the credit card market "that keep merchant interchange fees higher than the market should allow and also prevent merchants from offering consumers lower-priced choices."
