Credit Card Interchange Fees

STATUS - On February 15, 2006, the House Subcommittee on Commerce, Trade, and Consumer Protection is scheduled to conduct a hearing entitled "The Law and Economics of Interchange Fees." Witnesses included the National Association of Convenience Stores, the Small Business and Entrepreneurship Council, and the U.S. Public Interest Research Group.

During consideration of the "Gasoline for America’s Security Act of 2005" (H.R. 3893) by the U.S. House of Representatives in October 2005, a provision was included that would require the Federal Trade Commission (FTC) to conduct "... an analysis of the role and overall cost of credit card interchange rates on gasoline and diesel fuel retail prices." It remains uncertain as to whether the Congress will take additional action.

Dozens of lawsuits are pending in Federal Court. Recently, suits have been filed in federal court in Connecticut, New York (3) and Pennsylvania.

In Connecticut, the suit alleges that MasterCard, Visa, and major banks engaged in collusive practices by setting card interchange fees at supra-competitive levels. The complaint seeks injunctive relief to stop the alleged anticompetitive practices plus damages.

In New York, one of the suits filed against Visa and MasterCard accuses the card associations of price fixing and adopting rules that prevent the businesses from negotiating lower rates. The second suit in NY alleges that credit-card companies held secret meetings where they colluded to promote arbitration, in violation of federal antitrust laws. The third suit in NY alleges that MasterCard, Visa, and major banks engaged in collusive practices by setting card interchange fees at supra-competitive levels.

In Pennsylvania, the suit is seeking to eliminate rules prohibiting merchants from passing interchange fees on to consumers through surcharges.

The Federal Reserve Bank of NY hosted a conference on September 15 and 16, 2005, entitled “Antitrust Activity in Card-Based Payment Systems: Causes and Consequences. The Federal Reserve Bank of Kansas City has also held a conference looking into the role of public authorities in interchange fees.

BACKGROUND -The Federal Reserve's recent payments research shows that in 2003, for the first time ever, businesses and consumers made more payments electronically than by check. As businesses and consumers continue to migrate to electronic payments, including cards (credit cards, charge cards, payroll cards, stored value cards, and debit cards), many issues are likely to arise and get the attention of regulators and legislators.

Currently, the issue is being fought in the courts. However, the public policy question is whether the U.S. should regulate interchange fees and/or what role the Federal Reserve should play in overseeing interchange. The Federal Reserve does not regulate the credit card industry or price competition. It does regulate the banks that issue credit/debit cards. Price and competition issues usually fall under the jurisdiction of the U.S. Department of Justice and the Federal Trade Commission.

Thirteen (13) trade associations including the National Retail Federation, the Food Marketing Institute, the National Grocers Association and the National Association of Convenience Stores, formed The Merchants Payment Coalition. The goal of the coalition is to look at a "... variety of avenues to help U.S. merchants obtain more reasonable interchange rates."

Internationally, several countries regulate interchange fees in some form. A paper presented at the Kansas City Fed meeting concluded that those countries that have either regulated or threatened regulation have seen interchange fees decline. The study looked at Australia, Canada, Mexico, USA, Denmark, Netherlands, Spain, Sweden, UK and EC cross border. The US and Canada were the only two where interchange fees are increasing.

AFP ACTION – The Payments and Technology Task Force (a task force of the AFP Government Relations Committee) met with the Fed during the March 2005 AFP GRC meeting. At the September 2005 AFP Government Relations Committee meeting members of the committee discussed the issue with several Congressional offices.

AFP has recently issued "A Corporate Guide to Card Payments and the Role of Interchange," which describes the transaction flows in the credit and debit card process, the structure of interchange pricing and related fees, and ways to avoid the pitfalls that increase costs. The "Guide" is available as an e-document through the AFP Store at www.afponline.org/pub/store/pubs/ecgpay.html

AFP released a survey on the issue at the 2005 Annual Conference that found that organizations are unable to refuse credit cards even as the high cost of accepting credit and debit cards becomes a growing concern for American businesses. Many financial professionals believe their organization would sustain a significant decline in sales if it no longer accepted certain cards, especially those offered by Visa and MasterCard. Full survey results are available at www.AFPonline.org/research.