Visa Is to Blame for Debit-Fee Cap Plan, Discover's Nelms Says

Visa Inc., the world’s biggest payments network, is to blame for a U.S. Senate proposal that would cap fees merchants pay to accept debit cards, Discover Financial Services Chief Executive Officer David Nelms said.

“Visa has tremendous market power in this area, and that’s how we ended up here,” Nelms said in an interview today after Riverwoods, Illinois-based Discover posted second-quarter results. “Visa raised prices quite a bit and, I think, took the actions that have led to the legislation in the first place.”

The measure pushed by U.S. Senator Richard Durbin as part of the financial-overhaul bill would empower the Federal Reserve to set “swipe” fees, or interchange, that are “reasonable and proportional” to the cost of processing debit transactions. The Illinois Democrat and majority whip also backs a provision that directs the Fed to issue rules barring networks from requiring that their debit cards can only be used on one network.

That non-exclusivity rule may create an opportunity for the Discover-owned Pulse debit network and other competitors to gain market share. San-Francisco-based Visa accounted for 73 percent of U.S. debit purchase volume last year.

“That opens up the prospect that Pulse or other debit networks could no longer be excluded from those cards, and that could be a pro-competitive outcome,” Nelms said. Discover opposes Durbin’s proposed debit-fee caps as government price controls “could be a negative for consumers,” Nelms said.

Photographer: Tim Boyle/Bloomberg

David Nelms, chairman and chief executive officer of Discover Financial Services. Close

David Nelms, chairman and chief executive officer of Discover Financial Services.

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Photographer: Tim Boyle/Bloomberg

David Nelms, chairman and chief executive officer of Discover Financial Services.

Visa spokesman Will Valentine declined to comment.

Visa and No. 2 MasterCard Inc. set interchange fees and pass the money to card-issuers including Bank of America Corp. and JPMorgan Chase & Co. Interchange is the largest component of the fees U.S. merchants pay to accept Visa and MasterCard debit cards. The fees totaled $19.7 billion and averaged 1.63 percent of each sale last year, according to the Nilson Report, an industry newsletter.

To contact the reporter on this story: Peter Eichenbaum in New York at peichenbaum@bloomberg.net

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