In testimony before the House Subcommittee on Commerce, Trade, and Consumer Protection, former Federal Trade Commission chairman Timothy Muris defended current industry practices against consumer advocates and a merchant trade association. He spoke at the request of the Electronic Payments Coalition, a financial services industry trade organization.
At stake is over $30 billion in interchange fees paid annually by merchants to their acquiring banks, representing approximately 15 percent of issuing bank profits. In a consolidated complaint encompassing 47 antitrust lawsuits, merchants have alleged that the banks and the associations have engaged in anticompetitive behavior. "The card associations set interchange rates for all of their member banks, and all of those member banks must agree to charge the same rates," said Henry Armour, president and CEO of the National Association of Convenience Stores (Fairfax, Va.). "This is nothing more than price fixing."
Muris responded by questioning the motives of the merchants and their attorneys. "The lawyers believe they can extort a settlement - $1 trillion [after treble damages]," he said.
Considering the incentives involved, Muris questioned what it is the merchants are really after. "The merchants that support the cases could not possibly want the end of interchange fees being fixed," contended Muris. "It would harm consumers and threaten the very existence of Visa and MasterCard."
"Instead, what they want is for the government to fix prices for the industry, but at a lower level," continued Muris. "How could a lower court fix prices as a result of price-fixing claims?"
In addition, Muris cited the example of what happened in Australia when its central bank lowered the permissible interchange rate. The short-run result, according to an AEI-Brookings study, was that consumers ended up paying more for their credit cards because of the decreased interchange rate, while at the same time, merchants generally failed to pass along the savings to their customers. But as for the long-term results, whether competition among both card issuers and merchants leads to lower prices, it's too early to tell.
What Do They Want?
Supporting their claims against the card industry, the merchants cited several concerns. First, the price level of interchange in the U.S. seems to be higher relative to other geographies. "We have the highest volume of transactions, the best technology, and very low and decreasing rates of fraud," noted Armour. "Our interchange rates ought to be the lowest in the world, not among the highest."
On a practical level, the operating rules of Visa and MasterCard lack transparency. "Visa and MasterCard require retailers to sign merchant agreements, and refuse to fully disclose what the operating rules are," said Armour. "None of our members have been able to get a copy of the 1,200-page operating rules."
Disputes over undisclosed operating rules have led to conflicts between merchants and their banks. For example, merchants are required to accept card transactions of any amount, but in certain cases, merchants have received unexplained error codes (e.g. "Error Code 96") preventing them from receiving payment. "Many members have had chargebacksVisa and MasterCard see a credit card purchase for gas of more than $50 and refuse to pay the merchant for that purchase, even though the consumer has paid the bank for that charge," contends Armour. "The operating rules have a huge impact on the actual cost of accepting Visa [and] MasterCard."
About 60% of motor fuel sales are paid for with credit and debit cards, making the cards a necessary part of doing business. "As a practical matter, my members have absolutely no choice but to take credit and debit cards," said Armour.
Muris pointed out that merchants could always post a separate price for credit to make up for any and all costs incurred by its merchant agreements with the acquiring banks. "Any merchant can discount for cash," he said. "Gas stations used to discount for cash; that was common 25 years ago."
But it's difficult for a modern fuel retailer to adopt the retailing practices of the 1970s, especially with higher risk of theft at the gas pump and the emergence of the gas station as all-purpose retailer. "Most state and local regulatory environments require you to post both the cash price and the credit card price," noted Armour. "So if you have 3,500 items in your store, you'd have to show the credit price and the cash price, which is a huge burden."
Edmund Mierzwinski, consumer program director, U.S. Public Interest Research Group, called for the Government Accountability Office (GAO) to perform a study of interchange independent of the Federal Reserve and other banking regulators, and to investigate the disparities in consumer protection between credit, debit and gift cards.