March 29, 2006

In testimony before the House Subcommittee on Commerce, Trade and Consumer Protection in mid-February, former Federal Trade Commission chairman Timothy Muris defended current card 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 more than $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 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 Fairfax, Va.-based National Association of Convenience Stores (NACS), at the hearing. "This is nothing more than price fixing."

Considering the incentives, Muris questioned what it is the merchants really are after. "The merchants that support the cases could not possibly want the end of interchange fees being fixed -- it would harm consumers and threaten the very existence of Visa and MasterCard," he testified. "Instead, what they want is for the government to fix prices for the industry, but at a lower level. ... How could a lower court fix prices as a result of price-fixing claims?"

In addition, Muris pointed to 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, while at the same time, merchants generally failed to pass along the savings to their customers. As for the long-term results, it's too early to tell whether competition among both card issuers and merchants leads to lower prices.

What Do They Want?

In supporting their claims against the card industry, the merchants contended that the price level of interchange in the U.S. is higher relative to other geographies. "We have the highest volume of transactions, the best technology, and very low and decreasing rates of fraud," noted NACS' Armour. "Our interchange rates ought to be the lowest in the world, not among the highest."

Further, on a practical level, the operating rules of Visa and MasterCard lack transparency, Armour argued. "Visa and MasterCard require retailers to sign merchant agreements and refuse to fully disclose what the operating rules are," he asserted. "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, they have received unexplained error codes preventing them from receiving payment. "Many members have had chargebacks -- Visa 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," said Armour. "The operating rules have a huge impact on the actual cost of accepting Visa [and] MasterCard." About 60 percent 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 noted that merchants could post separate prices for credit to make up for costs incurred by its merchant agreements with the acquiring banks. "Gas stations used to discount for cash; that was common 25 years ago," he said.

But it's difficult for a fuel retailer to adopt retailing practices from the 1970s, especially with 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 NACS' 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." *

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