WASHINGTON-New legislation that would open the market for credit and debit card interchange fees to competition would harm small card issuers like credit unions and community banks, members of Congress were told last week during a hearing on a new interchange bill.
Credit unions maintain their opposition to the bill, introduced in each of the last two congresses, that would allow merchant groups to negotiate directly with Visa, MasterCard and the other card companies on lower rates charged on transactions, according to John Blum, chief operations officer for Chartway FCU, who was testifying before the House Judiciary Committee yesterday. Blum told lawmakers his credit union continues to oppose the bill even with a provision that would allow credit unions and other card issuers to opt-out of any fee structure negotiated by merchants because the exemption would leave credit unions and those issuers at a disadvantage.
Credit unions have been put in a difficult position in the fight, which has pared them with the banks and Visa and MasterCard to lobby against the bill as an Electronics Payments Coalition. That's because both sides of the issue agree that small issuers like credit unions and community banks make very little profit on their interchange revenue, but that the interchange provides big profits for ten large banks that account for 80% of all cards transactions. Those ten banks earned the vast majority of the estimated $48 billion in interchange fees paid by U.S. consumers as recently as 2008.
Chartway's Blum told lawmakers his $1.5-billion Virginia Beach credit union earned about $2.4 million in interchange fees last year on some 15 million card transactions it processed. That left little margin after subtracting the costs for 11 people running its card operations and some $450,000 in fraud-related expenses or insurance costs.
"For small institutions, credit unions and community banks, that don't have the economies of scale, they're not making much money," said Douglas Kantor, a Washington lawyer representing the National Association of Convenience Stores and the Merchants Payments Coalition who are lobbying for the bill on interchange fees. The big banks, he said, "are making huge profits."
This year's bill is similar to legislation proposed in 2008 by House Judiciary Committee Chairman John Conyers. That bill narrowly passed the committee but was never voted by the full House. This year's bill, also backed by Judiciary Chair Conyers, is also not expected to be voted by the full House but will leave a roadmap for the next Congress.
The new bill is among several making their way through Congress to open the interchange markets to more competition and is being driven by huge retailers and gas station owners who want the ability to negotiate lower fees with the credit card companies. The bill would give those entities an exemption from antitrust laws to allow them to enter such negotiations.
Another bill would eliminate the arbitration requirements for credit card disputes and allow cardholders to sue the card companies over disputes. Another bill would bar Visa and MasterCard from preventing merchants on the threat of fines from directing consumers to cards charging lower interchange fees, such as Discover.
The battle is the latest to pit the credit unions, which with the banks are the biggest owners of Visa and MasterCard, against the consumer groups. Recent bills have teamed the credit union lobby with the banks on legislation to lower fees on overdrafts, and earlier on bankruptcy laws. CUNA and NAFCU are part of the Electronic Payments Coalition with the American Bankers Association, Visa, MasterCard and several banks, including JP Morgan Chas, Wells Fargo, Bank of America and Citibank. Gateway's Blum testified on behalf of NAFCU and the coalition.
Edmund Mierswinski, an attorney for consumer advocacy U.S. Public Interest Group, said current law gives Visa and MasterCard the ability to set prices because they control some 80% of the cards market. And it prevents retailers from explaining to their customers how to save money by using a preferred method of payment.
The merchants side was represented yesterday by David Carpenter, an Iowa owner of six convenience stores who also owns a community bank, Liberty Bankshares of Des Moines. Carpenter said his community bank, like most small institutions, makes a very thin profit, if any, on revenues earned from interchange. But, he said, they would continue to offer cards to their customers even if the bill reduced interchange revenue as intended, as a convenience for the bank's customers. "The reason we issue payment cards is for the convenience of our customers," said the merchant/banker. "We would continue to offer cards if interchange was cut."
