WASHINGTON — Congress continued its assault on financial institutions' profitability last week with growing momentum to regulate the market for credit card interchange fees, a lucrative profit center for credit unions and banks.
Lawmakers, backed by consumer groups, called 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.
The latest initiative, which is opposed by the credit union lobby, puts credit unions in increasing conflict with consumer groups as do efforts to limit charges for overdraft protection programs, reign in abusive credit card practices and allow at-risk borrowers to ask the bankruptcy courts to amend the terms of their mortgages — all opposed by credit unions.
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.
Potential Result: Caps on Interchange
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. "I believe action is needed to help level the playing field between consumers, small businesses, and credit card companies by requiring greater transparency and prohibiting unfair and abusive practices when it comes to interchange fees," said Shuster.
"This legislation focuses heavily on transparency in the hopes of determining whether credit card companies are pursuing anti-competitive practices," said the Republican lawmaker. "It makes Interchange Fees subject to full disclosure and terms and conditions set by credit card companies easily accessible by consumers. It would also prohibit profits from Interchange Fees from being used to subsidize credit card rewards programs. Small businesses, and ultimately consumers, should not be financing perks of luxury card holders."
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."
Unintended Consequences Feared
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, even after the two companies went public in recent years.
Kathy Miller, an owner of a mom and pop grocery store in Elmore, Vt., told lawmakers that on many card transactions the interchange fees she pays exceed the profits. She said she could refuse to accept cards and insist on cash only, but if she does she could be fined thousands of dollars by the card companies under their rules if she wants to continue to accept cards for large transactions.
Card Companies Control Market
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.
"Visa and MasterCard," he said, "both were formed as consortiums of competitors. On the one hand these banks compete to get consumers to sign-up for and use their cards. But on the other hand, operating through Visa and MasterCard, they present a united front of collectively imposed fees and they all charge the same price," he said, calling for government oversight of the market.
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."
"These virtually unregulated credit card interchange policies are not restrained by any market forces, harm small businesses and other merchants and also harm consumers," said the well-known consumer advocate.
There are separate bills being also debated by the House and Senate that would enable large retailers, like Wal-Mart, to negotiate directly with card companies on their own interchange fees.
