The Federal Reserve Bank of Kansas City chose a provocative title for its first payments conference, which will kick off today in Santa Fe, N.M.: "Interchange fees in the credit and debit card industries: What role for public authorities?"
Merchant complaints about the ever-rising cost of accepting cards have grown louder in recent years, and several months ago retailer trade groups formed the Merchant Payments Coalition to advocate the regulation of interchange.
Mallory Duncan, the coalition's chairman, says those concerns have even prompted some merchants, which he would not name, to discuss buying or forming a consortium to buy Discover Financial Services Inc. (Last month Morgan Stanley said it would spin off Discover.)
No one at the Kansas City Fed is suggesting that regulators will get involved in controlling interchange any time soon. The purpose of the conference is "to encourage a dialogue," said Stuart E. Weiner, a vice president and the director of payments system research at the Kansas City Fed.
"It is clear this is a fruitful area for research," he said. "There is some disagreement between certain groups in how to look at interchange. From our standpoint, we are information-gathering."
Still, the 100 or so expected attendees - including representatives of merchants, networks, issuers, consumer groups, and some academics - can look forward to a spirited debate.
Sharon Gamsin, a spokeswoman for MasterCard International, wrote in an e-mail that, considering the track record of some speakers, "we'll be surprised if we don't hear a lot of anti-interchange rhetoric, which we plan to address."
Avivah Litan, a vice president and research director at Gartner Inc. in Stamford, Conn., said she sensed a lot of "nervousness" among participants about the conference.
"Everyone is approaching it very cautiously, because of all the litigation," she said. "There is some fear that anything that is said could be used against them in court.
"The best we can hope for is a fuller understanding of each party and a willingness to work together, because they are facing each other on the podium instead of in open court," Ms. Litan said.
Mr. Duncan, who is also a senior vice president and the general counsel at the National Retail Federation, called regulation "one very good idea," and he noted that other countries have forced reductions in interchange. Australia, which has limited interchange for Visa U.S.A. and MasterCard, could offer a model for the United States, he said.
"Credit card interchange in Australia is less than half of what U.S. consumers pay," he said. "From our perspective, the banks have almost treated interchange like the dirty little secret it is. It is time the public realized just how badly they are being gouged."
The conference will be a good forum, because the Federal Reserve Board "has a lot of persuasive authority with the public and Congress," he said. "The banks are on the verge of killing the goose that laid the golden egg. By relying so heavily on interchange, they have brought attention to an issue that hasn't been in the spotlight."
The coalition cited calculations by Morgan Stanley that the average interchange rate increased 17 basis points from 1998 to 2004, to 1.75%, and the dollar volume of interchange rose 85%, to $17.4 billion. By 2010, Morgan Stanley predicts, the average rate will rise another 11 basis points, and the dollar volume will rise another 86%.
As a result of the increases last month, some interchange rates are as high as 2.9%, Mr. Duncan said.
But not all merchant representatives sounded sure that regulation is the answer.
In an interview this week, Jennifer Hatcher, the director of government relations at the Food Marketing Institute, demurred when asked what type of action merchants would like the Fed to take.
"I don't think it is clear," said Ms. Hatcher, whose group belongs to the Merchant Payments Coalition. "Clearly, some competition needs to be brought into the system. I am not sure what the answer is, but it is good to see the Fed is starting to look more closely at the issue and the impact rates have."
Some payment industry experts brushed off merchant complaints by saying the current system is working well.
"Merchants want to have their cake and eat it, too," said former Federal Trade Commission Chairman Timothy J. Muris, now a professor at the George Mason University School of Law and a consultant for Visa U.S.A. "Obviously, the retailers would like to pay less."
Any regulation that reduces interchange would have negative consequences, he said. "Consumers will be hurt, annual fees will go up, and rewards will go down."
Visa and MasterCard have already bargained with certain classes of merchants, such as grocers, and have lowered interchange when necessary to persuade them to accept cards, Prof. Muris said.
"Obviously, there are negotiations between individual merchants and categories of merchants" and payment networks to set prices, he said.
William Sheedy, Visa's executive vice president of bankcard research and interchange strategy, said he shares merchants' concerns about the cost of interchange, but he said he wonders "what exactly is not working in this payment system" that regulation might fix.
"In my discussion with regulators, I don't think they are contemplating regulation," he said. "They will use the conference to get better educated on the payments system."
