Merchant acquirers should be as concerned as the card brands over proposed legislation that would alter merchant fees, according to the Electronic Transactions Association, a Washington, D.C.-based trade group representing the acquiring industry.
Senate Majority Whip Dick Durbin, D-Ill., on May 6 introduced three interchange-related amendments to the Senate’s financial-reform bill, prompting swift criticism from the payments industry.
One of Durbin’s amendments would enable merchants to offer consumers discounts for using forms of payment less costly than certain credit cards. Credit cards typically carry interchange rates of between 2% and 3% of the sale, depending on the brand and card type. Merchant acquirers pay interchange to card issuers and pass the expense on to their retailer clients. Merchants claim interchange fees cost them some $48 billion in 2008.
Another of Durbin’s amendments would enable the Federal Reserve to set interchange rates for debit card transactions, and a third amendment would ensure that the U.S. government receives a favorable rate on interchange.
“I can tell from reading these amendments there’s a lack of understanding among elected officials about the functioning of the electronic payment system,” Mary Bennett, ETA director of government and industry relations, tells ISO&Agent Weekly. “These amendments interject the federal government into the payment systems at different points. It will have terrible consequences for consumers, not to mention merchant acquirers.”
‘Puzzling Amendment’
The amendment enabling merchants to choose which cards to accept would violate the universal acceptance tenet of the payment card system, Bennett says.
“It’s a puzzling amendment,” she says. “It goes against our core belief of ubiquitous acceptance and an interoperable system.”
And the amendment setting rates for debit card transactions is problematic because it assumes check transactions are free for the merchant, Bennett says.
“Bounced checks are very expensive for merchants,” she says. “Debit transactions don’t bounce. There are significant benefits on the debit side that don’t exist on the check side.”
If checks were inexpensive, high-volume merchants, such as supermarkets, would push for them more, says Trent Voigt, chairman of JetPay LLC, a Carrollton, Texas-based payment processor. “People don’t think of checks as expensive items, but they are,” Voigt says.
Bad checks and fees banks charge for making check deposits add to their costs, Voigt says. “If they were cheap, grocery stores would want them,” he says.
Bennett also doubts a federal law is necessary to ensure the government receives the lowest interchange rate. “We don’t think the government has a role in setting interchange rates for a specific category of consumers,” she says, noting the federal government already receives one of the lowest interchange rates because of the volume of its transactions.
In a speech last week on the Senate floor, Durbin said his amendments are overdue. “We are not saying there should not be an interchange fee,” Durbin says. “We are saying that it should be reasonable. And if it does not involve effort, service or liability on the part of the credit card company, such as the debit card, it ought to be reflect in the fee that is charged.”
Debit card issuers do have costs because they assume the liability for these types of transactions, Bennett says. Consumers are liable for bad-check transactions, she says.
Visa Inc. called Durbin’s interchange amendments an attempt “to sneak rehashed legislation harmful to consumers” into the financial services overhaul bill. The card brand sent a letter asking senators to “see these efforts for what they are–a blatant attempt by retailers to increase their profits at the expense of consumers.”
MasterCard Worldwide said in a statement that any rule enabling merchants to set minimum or maximum transaction amounts for electronic payments would cause havoc at the point of sale and would ultimately penalize consumers. “Network rules currently protect consumers from this type of harm and must be left in place,” MasterCard said.
In a joint statement to senators, the American Bankers Association, the Independent Community Bankers of America, The Credit Union National Association and the National Association of Federal Credit Unions said Durbin’s amendments would have “devastating consequences” for smaller financial institutions, particularly community banks and credit unions. Smaller institutions offering card payments to their customers likely would be “squeezed out of the marketplace by a protected class of large retailers bent on reaping more profits,” resulting in fewer choices for consumers.
Mallory Duncan, chairman of the Merchants Payments Coalition, which represents the nation’s largest retailers, says Durbin’s amendments would be “an important step forward” for merchants in their long fight to get the government to intervene in the interchange debate. “These measures don’t directly address our big issue, which is overall credit card interchange reform. But they would help us.”
No votes have been scheduled yet for either Durbin’s or Harkin’s amendments.
Kate Fitzgerald, senior editor at PaymentsSource, contributed to this article.
