It's a big box thing

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The merchant lobby has long positioned interchange fees as a small-business issue. Mom-and-pop gas station and convenience store owners were reliably trotted out at Congressional hearings and in local news articles to describe how fees for accepting payment cards were squeezing their profit margins.


On Tuesday, Visa Inc. Chairman and Chief Executive Joseph Saunders offered a powerful counter-narrative – perhaps too late, given that the Senate last week passed an amendment to the financial reform bill giving merchants much of they’ve wanted for years.

“This is a victory for Wal-Mart,” he said during an investor presentation. “This is a big-box thing.”

Illinois Democrat Dick Durbin’s amendment would give the Federal Reserve Board authority to control the fee system for debit cards. It would also allow merchants to set minimum purchase amounts for credit and debit card purchases, without being subject to a penalty by the networks. And the amendment would let retailers give customers discounts for using one credit card network — which may charge a lower interchange fee — over another.

Institutions with less than $10 billion in assets would be exempt from the Fed’s price controls. But bankers have called that eleventh-hour concession to their industry useless. If Bank of America and JPMorgan were required to cut their fees, they argue, First National Bank of Anywhere would have to follow suit to stay competitive.

Saunders reiterated that argument during his presentation.

“What are you going to do?” he asked. “Go [to the] merchant and tell them, ‘you can discount or set minimums, do whatever you want – and by the way, if anybody is banking with a small bank you are going to pay more for that transaction’?”

He was correct to say that the amendment would benefit Wal-Mart, which, you may remember, tried a few years ago to get an industrial bank charter to reduce the fees it pays for accepting cards. When you do close to $400 billion in sales a year, even a low-single-digit percentage paid out to merchant acquirers adds up. And even a small reduction to that percentage mandated by the Fed would mean real money.

You may also remember that community banks waged an effective lobbying campaign against Wal-Mart’s application, casting the King of Category-Killers as the heavy, a threat to small-town institutions (even though the proposal steered clear of retail banking). Wal-Mart eventually withdrew.

The payments industry has pointed out in the past that big-box retailers – not just corner shops – have a dog in this fight. But rarely have the card companies made that point so forcefully by evoking the Bentonville behemoth as Saunders did Tuesday.

Their reticence to use such rhetoric is understandable, since Wal-Mart’s market power makes it a “valued customer,” to put it mildly, for all suppliers, including the card brands. But imagine how consumers would react when told they would have to start paying annual fees for credit cards they’ve carried in their wallets for years … just so Wal-Mart can save a few pennies.  

Admittedly, that would a gross oversimplification. The local florist or dry cleaner – who doesn’t have Wal-Mart’s clout to negotiate price breaks from Visa or MasterCard and risks losing customers if she refuses to take cards – obviously would benefit from lower fees, too. Possibly more so than a national chain. And a credit card issuer could conceivably find ways to make up lost merchant revenues other than adding consumer fees (especially in an environment where consumers hold big financial institutions in low regard).

But the other side hasn’t been above using logical fallacies to rally public support. Remember 7-11’s petition against “unfair credit card fees” last year? How many of the million or so shoppers who signed it read the fine print and realized the “unfair fees” in question weren’t their own late charges and overlimit penalties?

Given the overwhelming 64-to-33 passage of the amendment, and Senate leaders’ determination to pass the bill this week, all this may be academic now. Still, if the merchants come back later and try to expand the Fed’s reach to cover credit card interchange as well, maybe we’ll see the payments lobby start to play the Wal-Mart Card more.   


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