Four witnesses testifying April 28 before the U.S. House Judiciary Committee on credit card interchange regulation agreed on one thing: A handful of the largest banks benefit most from interchange. And the potential effect of interchange-rate regulation on smaller community banks and credit unions, which struggle to compete against the giants, is murky.
The latest hearing on the “Credit Card Fair Fee Act,” which Judiciary Committee Chairman John Conyers, D-Mich., introduced in 2008 and 2009, amounted to a redux of mostly familiar arguments overlaid with an urgency to take action. Proponents of interchange reform contend the cost of interchange has increased the burdens on consumers and small businesses, especially in a tough economy.
The bill, which hinges on antitrust law, would require Visa Inc. and MasterCard Worldwide to enter into negotiations with merchants to set interchange rates. The U.S. Justice Department would oversee negotiations.
Douglas Kantor, a partner with Washington, D.C.-based Steptoe & Johnson LLP and a lawyer for the Merchants Payments Coalition, said if legislation forced interchange rates to lower levels, consumers would have some $27 billion more to spend in the overall economy, which he equated to creating 242,000 new jobs.
The coalition claims consumers in 2008 paid $48 billion in credit card interchange fees merchants passed along through the prices they set for their products and services. The nation’s 10 largest banks account for more than 80% of all interchange fees charged, Kantor said. “Right now, we don’t have a free-market system. (This bill) would allow some competitive dynamics to come into the system for the first time ... with protections for smaller institutions.”
Ed Mierzwinski, consumer program director for Washington, D.C.-based U.S. Public Interest Research Group, said card payments account for 80% of all transactions at convenience stores, and the interchange merchants pay cuts into their profits. “And it’s going to get worse because banks are trying to ... get consumers to put government payments onto prepaid debit cards,” he said.
David Carpenter, president of a six-store, Urbanville, Iowa-based convenience-store chain who also serves on the board of West Des Moines-based Liberty Bank, a Visa credit card issuer, said his dual role provides insight into “the effect that runaway card fees have on convenience stores as well as the negligible impact of payment card operations on community banks’ profitability.” Carpenter said his retail operation paid more than $900,000 last year in interchange fees, while interchange last year contributed zero profit to Liberty’s bottom line.
Liberty issues Visa-branded cards “purely for the convenience” of its customers, he said.
Carpenter disagrees with the contention that lowering interchange rates would harm community banks, as many previously have argued. “The way it is, the huge banks make big money on interchange and market heavily to our customers through direct mail and otherwise,” he said.
Indeed, contrary to some reports, interchange accounted for somewhere between 8% and 9% of Chartway Federal Credit Union’s profits last year, which largely were consumed by the cost of maintaining a credit and debit card program and covering fraud losses, testified John Blum, vice president of operations at the Virginia Beach, Va.-based institution. The credit union lost money on its 1% cash-back rewards credit card last year, Blum said.
Rep. Jason Chaffetz, R-Utah, challenged merchants to prove how they would pass on potential savings from interchange-rate reductions to consumers.
Kantor responded by saying the intense competition of the retail marketplace ensures that when retailers’ overhead costs decline, as would be the case if interchange rates were reduced, merchants would pass those savings on to consumers to reap more business.
The American Bankers Association in a statement reiterated its opposition to the bill, which it says “represents yet another attempt by the merchant community to try, at the behest of large retailers, to get Congress to lower their cost of doing business, all to the detriment of consumers and the broader economy.”
Near the conclusion of the three-hour hearing, Rep. Bill Delahunt, D-Mass., called for Conyers to schedule a markup on the bill to move it to a full House vote. The committee has not yet announced plans for a bill markup.
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