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This story appears in the January 2009 issue of Cards&Payments.

Legislation that would reduce or cap credit and debit card interchange rates is likely to make further headway in Congress this year, some observers believe.

Such legislation built strong momentum last year when the U.S. House Judiciary Committee approved the Credit Card Fair Fee Act, which would force card networks to negotiate new interchange rates with merchants. That bill ultimately stalled, but merchant-industry representatives say the chances this year are excellent for a similar bill to reach the House and Senate floors for debate and possible passage.

"Under a new president and with new members in Congress, we expect to see legislative action this year that would bring merchants some relief from interchange fees," says J. Craig Shearman, vice president of governmental affairs for the National Retail Federation. "Lawmakers want to crack down on problematic financial-services practices, and interchange fits that description."

The retail federation chairs the Merchants Payments Coalition, whose members include dozens of retail industry associations including the National Restaurant Association. The coalition for several years has lobbied lawmakers to take action on interchange rates.

Analysts are divided about the odds for interchange regulation succeeding.

"I hate the idea of restricting the marketplace through regulation, but Congress will eventually have to step in and regulate interchange, at the least making it a more efficient and transparent system," says Mike Moebs, president of Moebs Services Inc., a consultancy that advises banks on managing their prices and costs. "Given the combination of cheaper alternatives and constantly improving technology, there is no justification for merchants to pay so much in interchange. But because Visa and MasterCard operate like oil cartels, it will require government intervention to force change." 

Adil Moussa, an analyst with Aite Group, gives even odds that Congress will pass legislation that would restrict interchange rate-setting.

It may not do so because banks already are suffering from the economic crisis and are seeking government funds for survival, Moussa says. "Cutting or capping interchange could increase banks' dependence on the government," he says, which could dampen interchange regulation's chances.

However, some merchants cite higher business costs as a reason for seeking bankruptcy protection, while consumers also are asking for protection from rising prices, Moussa says. Both of those factors could help galvanize a push for interchange regulation this year, he says.

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