Credit-Card Fee Reform Stays on the Back Burner

Credit-card holders got relief earlier this year when Congress pushed through legislation to eliminate some of the card industry's sneakier practices. But store owners, who have similar long-standing gripes about the transaction fees they're charged by banks and card companies, are getting little traction for their cause.

It's not for lack of trying. Retailers have spent years and millions of dollars lobbying for tighter rules on "interchange fees"—the non-negotiable 1.6% or so merchants pay to card-issuing banks each time a consumer buys something using a card. At an Oct. 8 hearing the House Financial Services Committee heard a small-store owner describe excessive and opaque fees the industry claims aren't held in check by competition and can wipe out already thin retail profit margins. Kathy Miller, owner of a grocery store in the 961-person town of Elmore, Vt., told the committee she may as well give small-ticket items away free because selling them costs her money after the interchange fees are accounted for. Currently, merchants are barred from demanding a minimum price for credit-card purchases. "We can't keep absorbing these fees," Miller said. "Some days I feel like I should just turn my keys in."

The complaints found a sympathetic ear in Congress. Three separate bills to rein in interchange fees have been introduced in the Senate and House. The toughest, from Senator Richard Durbin (D-Ill.), would give retailers antitrust protection so they could jointly negotiate lower rates. Also, merchants would have the option of not accepting cards that charge them higher fees, which are used to offer consumers rebates and perks. One of the House bills would let stores charge minimum and maximum amounts for card purchases. (The fees are split between the merchant's bank and the card-issuing bank. The card companies—Visa (V) and MasterCard (MA), mostly—claim they don't benefit directly from interchange fees, but they do collect fees from the issuing banks.)

Retailers vs. BanksThe problem for merchants is that while there is plenty of anger against banks and finance companies in the capital these days—as seen in moves to restrict bank executives' pay—their fight essentially pits two powerful industry lobbies against each other. Jaret Seiberg, an analyst at Stanford Group, believes powerful House Financial Services Chairman Barney Frank—who held the Oct. 8 hearing—is applying pressure on interchange fees only to get banks to give ground on the Obama Administration's proposed Consumer Financial Protection Agency. In his markup of legislation to enact that agency on Oct. 15, Frank struck a provision for interchange-fee reform. "I think the prospect of interchange legislation exploded in order to send a message to the banks to soften their opposition to consumer protection," says Brian Gardner, senior vice-president at investment bank KBW (KBW). "I have yet to ever meet a member of Congress who wants to get in the middle of that fight."

That may change if Congress becomes convinced that consumers are being gouged through the fees. A study, ordered as part of the credit-card reform law signed last May, is being conducted by the Government Accountability Office. If it finds that consumers are indeed hurt by the fees, the likelihood of overhaul legislation may improve.

The Merchant Payments Coalition, a retail lobbying group, claims consumers and merchants spent $48 billion on interchange fees last year. The group estimates that the figure has tripled since 2001 and is built into the cost of every product. The credit-card industry counters that rising fees simply reflect the explosion of credit-card use—which roughly tripled for Visa cards, to $1.5 trillion, from 1998 to 2007. The Electronic Payments Coalition, the card lobby, contends that consumers and retailers benefit enormously from the resulting convenience and network security the fees help support. It notes that McDonald's (MCD) saw a 20% boost in transactions after the chain started to accept credit cards in 2004.

Not surprisingly, the two sides disagree sharply over whether shoppers would see any savings if interchange fees were lowered. The card lobby insists that business owners would just keep the money. "I think they'll absolutely pocket the difference," says Trish Wexler, spokesperson for the Electronic Payments Coalition. "Why would they [pass savings to customers]? Are they spending millions and millions of dollars on lobbying and advertising so they can help their customers get a break? Of course not. They're doing it because it will increase their bottom lines."

Some outsiders experts believe, though, that given the nature of retailing, stores would be forced to lower prices. "If merchants are in a competitive industry, when their own costs drop, those costs get passed along to consumers," says Adam J. Levitin, associate professor of law at Georgetown University. "No one would question that for any other cost of doing business—that if a cost drops, some of it would be passed on."

Effect on Credit UnionsThe credit-card lobby also argues that small regional banks and credit unions would be harmed if any legislation were to pass. The Price Chopper Employees Federal Credit Union near Albany, N.Y., which serves 4,700 members in the Northeast, is wary of any changes. "For us to incur a ceiling on interchange fees would really hamper our ability to offer credit-card services," says credit union CEO Dawn Donovan. "We're competitive, our rates are really low, we'd hate to have to raise our rates to compensate."

But the concerns of small banks may be easily eased even if reform passes. One of the bills, proposed by House Judiciary Committee Chairman John Conyers (D-Mich.), excludes from any new restrictions credit unions and banks with less than $1 billion in assets.

The larger issue for retailers, especially small-business owners, is that they want more control over what types of cards they accept and when they have to accept them. Now, if merchants opt to accept Visa or MasterCard, they must accept all Visa- or MasterCard-branded cards even though different cards under one brand carry different rates. And they must accept card payment no matter how low the purchase price.

If allowed, smaller merchants probably would be more hesitant to accept rewards cards, which in Visa's case carry interchange fees as high as 2.4% per transaction, compared with Visa's roughly 1.6% average interchange rate. While this would keep merchants from having to subsidize the rewards of their customers, it might eliminate free rewards cards altogether, since banks would likely be unwilling to pay the rewards out of pocket.

The battle over card fees has been nearly invisible, buried under the high-decibel debates over health care and financial reform. But Mallory Duncan, general counsel of the National Retail Federation, is confident that some reform measure will pass in the near future, giving relief to store owners. "There are many paths to heaven," he says. "Our heaven is a transparent, competitive market, so we're happy no matter how we get there."

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