Market To Decide

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The Federal Reserve said last week it won't step in to regulate the increasingly acrimonious setting of interchange fees for credit and debit transactions and will leave it for the market to sort out.

That leaves credit unions-still modest players in the trillion-dollar-a-year market-stuck between the escalating battles between the merchants and credit card companies, Visa USA and MasterCard International, according to experts at CUNA's annual Payment Systems Conference agreed last week.

At stake is no small prize: $30 billion in interchange revenue a year.

A top Fed official said not only won't the Central Bank step in, but it believes it can't. "The Federal Reserve does not currently have the authority to regulate credit card and debit card interchange fees," said Stuart Weiner, vice president of payments system research at the Kansas City Fed. Weiner said the Fed has been asked by various consumer groups and members of Congress to, in effect, referee, the ongoing battle on interchange fees currently being fought in the courts between Visa and MasterCard, which are dominated by the big banks, and the merchants. But the Fed would only intervene in setting interchange rates, as regulators have recently in Australia, in the event of a crisis or some other emergency, said Weiner.

And the U.S. Justice Department, which monitors the markets for anti-competitive behavior, does not currently plan to intervene in the interchange battles, either, said Weiner. "That leaves the courts as the avenue for change. And it's likely to remain that way for the short-term," he said.

The likely result, according to payment systems experts, is that the smallest participants, small card issuers-like credit unions-and small businesses, will get squeezed, the largest merchants cut their own deals on interchange, as Wal-Mart is doing in the face of their huge anti-trust settlement with the two cards companies.

"This is a really big issue," said Tom Brown, senior counsel for Visa USA, who is defending the card association against numerous anti-trust suits brought by merchants. "It matters to the networks. It matters to financial institutions. It matters to the merchants. And it matters to consumers."

Brown maintained that under the current system interchange fees are set by the handful of players operating in the market, including Visa, MasterCard, American Express, Discover, the Fed, and a few others. To have a central regulator set interchange fees, as the Australian Central Bank did recently, would put an increasing burden on smaller issuers and consumers to pay the costs of transmitting the billions of dollars in cards transactions each day, he insisted.

The rate-setting experiment in Australia, according to Brown, has resulted in higher annual fees and finance charges assessed cardholders. "Cardholders have lost quite a bit. The issuers have lost," he said.

But David Balto, a Washington lawyer representing the merchants in their suit against Visa and MasterCard, said under the current system, in which the two cards giants set the rates for most of the transactions going over the U.S. networks fees keep increasing "for no apparent reason." "You don't see fees based on market forces," said Balto.

Still, Brown insisted the current system works well as it is, fostering innovation and providing good value for both merchants and consumers. "It is the most relevant, most advanced system in the world," he said.

Balto, a partner in Robins, Kaplan, Miller, & Ciresi LLP, said the merchants believe there is a better way to set interchange fees, and that is to inject more competition into the rate-setting, rather than have them set by the two cards giants.

"Is there a way that provides for a greater level of merchant choice, of competition?" he asked.

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