As if the banking system did not have enough to worry about at this point, the never-ending struggle over interchange still looms on the horizon.
A merchant lawsuit that continues to wind its way slowly through the courts has resurrected the challenge to the initial public offerings by Visa Inc. and MasterCard Inc. Rumors continue to swirl about legislation to regulate interchange.
At the end of January the merchants filed a revised, and quite strong, complaint that was designed at least in part to respond to Judge Gleeson's ruling dismissing the initial complaint they had filed challenging the IPOs.
This version is packed with details about the recognition by Visa and MasterCard, after the twin defeats in the Wal-Mart and Justice Department cases, that the pre-existing system, with competing banks collectively fixing interchange rates applicable to all transactions, was unsustainable. According to the merchants, this motivated both Visa and MasterCard to convert their association structures, which were potentially subject to antitrust challenges as conspiracies, to unitary "single entities," which are theoretically immune from such claims.
The merchants allege that Visa and MasterCard structured their IPOs to create a superficial veneer of independence from the banks while giving them a veto over any fundamental change to their governance. This structure, the merchants contend, violates the antitrust laws by perpetuating the interchange system that has existed for decades.
In a sense, this theory is tautological. If one believes interchange is anticompetitive, one will be much more inclined to accept the merchants' attempt to unwind the IPOs. But on its face, how strong is this theory?
The merchants put much emphasis on evidence whose significance can and will be hotly contested — for example, the fact that banks retain a large number of directors (in the case of Visa) and have put restrictions on any single nonbank's ability to gain substantial ownership in Visa or MasterCard. On the other hand, if the merchants can prove the banks have an expressed or implied veto power over any changes to the interchange system, that could dramatically increase their chances of challenging the IPOs.
Whatever the case, one cannot walk away from a review of the merchants' supplemental complaint without a sense that if the merchants got their day in court, they would put on a sophisticated challenge to the "new" Visa and MasterCard.
On the legislative front, after a flurry of activity last year, the terrain is beginning to heat up again.
In the previous Congress, legislation was considered in the House and Senate to amend the antitrust laws to ensure competitive, market-based interchange rates. Rep. John Conyers and Sen. Richard Durbin introduced these bills to address the disparity in bargaining power between individual merchants on the one hand and Visa, MasterCard and their member banks on the other. These bills, known as the Credit Card Fair Fee Act (HR 5546 and S 3086), were not identical, but they followed the same general pattern substantively.
Both provided for an antitrust exemption to allow the two sides to engage in collective negotiations over interchange rates and terms. If those negotiations failed, the bills established an administrative tribunal of three electronic payment system judges.
Ultimately, the House bill passed through committee with the tribunal system stripped out, but it was not put to a full vote. The Senate bill did not even receive a vote in committee.
Given the amount of work that went into this effort, the populist mood in Congress surrounding the Credit Card Accountability Responsibility and Disclosure Act and the sophistication and intensity of the merchant campaign to enact this legislation, further movement on these (or other) bills is a virtual certainty.
Such movement may be spurred by the Senate version of the act, which requires the Government Accountability Office to study interchange fees and their effects on merchants and consumers. The mandate suggests some sympathy for the merchant arguments against interchange. Potentially telling areas of inquiry could include how interchange affects the ability of merchants of different sizes to negotiate pricing, as well as the cost rationale for interchange, including the extent to which rewards affect the relevant costs.
Combine these areas of inquiry with a discussion of the "undisclosed nature" of interchange, and it is hard not to see a populist tinge to the GAO's mandate.
Against that backdrop, the dark horse challenge to interchange might come from the regulators, particularly the Fed. Though it has periodically exhibited an interest in this issue — most notably at the Kansas City Fed conference devoted to interchange — the likelihood of regulatory intervention on its part used to be extremely low. That is not true today.
With increasing regulatory fervor directed at the financial services industry, the retrenchment of credit and the continuing expansion of debit cards where the case for high interchange fees is particularly untenable, a substantial movement to regulate interchange by the Fed could be successful today. In fact, the best argument against such regulation — that it would be a mistake to deprive banks of interchange revenue at this perilous time — is, in fact, no defense at all.
At the end of the day, one thing is clear. If Visa and MasterCard continue to compete for issuance by exploiting their market power over merchants to continue to raise or maintain high interchange rates, and if the consumer costs and regressive nature of that system remain hidden, interchange will remain a hot button issue. And one day someone — the Fed, Congress or the courts — will actually do something about it.