The political change in Congress probably leads many credit card executives to imagine it could not be worse. Month after month, card executives have been dragged before congressional committees to justify alleged deceptive and fraudulent practices. Consumers also have testified on how their lives have been turned upside down by card schemes.
Now Congress has chosen to shed its spotlight on interchange fees. You can imagine the disappointment of the card companies. Interchange fees must seem as attractive to Congress as a study of nuclear physics-they are cloaked in secrecy and characterized as a transfer fee, and the proponents use sophisticated but often misguided economic concepts to justify them.
Why would Congress want to take this on?
Because the opponents of interchange, thousands of small-business merchants, have told a compelling story. Interchange fees are increasing dramatically and are far greater in the U.S. than in any other industrialized country. As Merchants Payments Coalition Chairman Mallory Duncan once noted, "This is the only market I know where the parties compete to raise prices rather than lower them."
A July 19 hearing on interchange before the antitrust task force of the House Judiciary Committee brought the debate to a head. By any measure, this was not a good day for the card associations, with nary a single congressman providing support.
Chairman John Conyers (D-Mich.) posed the debate for the participants: "Are interchange fees imposing an unfair cost on the consumer? Are interchange fees increasing at too rapid a rate, and why? Are credit card companies engaging in anticompetitive behavior?"
But the strongest critics of interchange fees came from the Republican side of the aisle. Rep. Rick Keller (R-Fla.) stated that the card companies "have no good explanation of why we are seeing these dramatic increases in interchange fees. I look at the merchants, and they have a good explanation."
Rep. Darrell Issa (R-Calif.), who as a merchant in real life has had to deal with the perplexing world of interchange-fee increases, was particularly pointed in his criticism. When a card association spokesperson suggested that Visa's rules were public, Issa replied: "Why in the world should this committee permit a gag rule to be in place keeping the public from knowing what they're being charged, especially when there is more profit in a gallon of gas for the credit card companies than the gas station?"
At the end Conyers said, "While I come into the hearing with an open mind, I do believe the burden of proof lies with credit card companies to reassure Congress that increasing interchange fees are not harming merchants and ultimately consumers."
For this round, the results of the debate seem clear that reasonable justifications for increasing interchange fees seem lacking. Moreover, the hearings clarified important areas of disagreement between retailers and the card associations.
Consumers complained about the high price of interchange. Although the card associations contend rising interchange benefits consumers in increased rewards and better services, Ed Mierzwinski of the U.S. Public Interest Research Group cites numerous studies that show interchange-fee increases do not benefit consumers.
Moreover, interchange increases the cost for all consumers, including those paying with cash and checks. These consumers basically subsidize credit card usage by paying prices inflated by the billions of dollars of anticompetitive interchange fees.
The question is, what is the role for Congress and, perhaps, ultimately regulators. Congress has a broad range of flexible tools to clarify the debate and call for regulation.
David Balto is an antitrust lawyer in Washington, D.C., and is the former policy director of the Federal Trade Commission. He can be reached at dbalto
(c) 2007 Cards&Payments and SourceMedia, Inc. All Rights Reserved.
Authoritative analysis and perspective for every segment of the payments industry
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