By: David A. Balto, Partner, Robins, Kaplan, Miller & Ciresi L.L.P.
Consumers are well aware of many payment systems costs, such as annual fees for credit cards, current account overdraft fees, late payment fees, and ATM fees. Far less transparent are “interchange fees”—the fees that banks pay one another for each credit card, debit card and ATM transaction made by their customers.
Interchange fees have existed for over a quarter of a century, so some might assume they are a necessary fact of life. But they have increased significantly over the past few years, and thus disputes and controversies between merchants and banks over the fees are intensifying. In the United States a group of merchants have sued Visa and Mastercard seeking over $8 billion in damages for supra-competitive interchange fees.
1 Just last month, in a report to the Chancellor of the Exchequer, a U.K. study on banking services called for substantial reform of the use of interchange fees.
2 In Australia, the Competition Commission is studying the role of interchange fees.
3 In the United States alone inter-change fees amount to billions of dollars each year, so the resolution of these disputes can have a tremendous impact on the fee income earned by banks and other financial institutions and ultimately on the efficiency of the payment system.
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By: David A. Balto, Partner, Robins, Kaplan, Miller & Ciresi L.L.P.
WASHINGTON, May 2 /PRNewswire/ — A coalition of business organizations today applauded the Federal Reserve Bank of Kansas City for holding a conference on credit and debit card interchange fees scheduled later this week, saying the rapidly escalating fees amount to a hidden tax on U.S. consumers.
“Merchants have known for years that banks’ interchange fees are a hidden tax that is driving up the cost of merchandise and services for American consumers every day,” Merchants Payments Coalition Chairman Mallory Duncan, senior vice president and general counsel at the National Retail Federation, said. “The Federal Reserve needs to question whether the growing use of cards rather than cash and checks — especially high-interchange debit cards — undermines the Fed’s ability to measure and manage the nation’s money supply. We welcome the fact that the Federal Reserve is concerned enough to hold a conference focusing on this issue, and hope that this is a sign of action to follow. American consumers and the American economy deserve protection.”
“The fees that the credit card companies charge defy logic and they are using them to increase profits far more than to provide any meaningful benefits to retailers,” coalition Secretary Teri Richman, senior vice president for public affairs and research at the National Association of Convenience Stores, said. “Credit card company rules effectively prohibit retailers from providing discounts for cash or checks in all but a handful of situations. As a result, consumers pay more even when they don’t use their cards. It’s time for this constant picking of consumers’ pockets to come to an end.”
“U.S. consumers and retailers pay among the highest interchange rates in the world, which makes no economic sense,” coalition Executive Committee member Jennifer Hatcher, director of government relations at the Food Marketing Institute, said. “With interest rates down, fraud down, and volume growing exponentially, U.S. rates should be among the lowest. As consumers increasingly use credit and debit cards as replacements for cash and checks in millions of daily purchases, the Federal Reserve must expand its oversight and regulatory role to maintain control over this significant part of our money supply and deliver efficiency for consumers.”
“We applaud the Federal Reserve’s exploration of the role of public authorities regarding interchange fees in the credit and debit card industries. Interchange has become a tax on consumers,” coalition Executive Committee member Stuart Zlotnikoff, senior vice president at the National Grocers Association, said. “The United States has the highest credit card interchange fees of any industrialized country. Paradoxically, costs should be less in the United States due to our greater economies of scale. Yet interchange rates have continued to increase, even while the costs of processing, borrowing and fraud have declined. The international precedents for cost-based interchange are persuasive and demand serious review by U.S. public authorities.”
The Federal Reserve Bank of Kansas City is scheduled to hold a conference on interchange rates May 4-6 in Santa Fe, New Mexico. The Merchants Payments Coalition will be represented at the conference by Duncan, Hatcher and Zlotnikoff.
Interchange, a fee that is collectively set by Visa and MasterCard’s member banks, is a percentage of each transaction — sometimes accompanied by a flat fee — that banks collect from retailers every time a credit or debit card is used to pay for a purchase, adding up to billions of dollars each year. Visa and MasterCard together make up 90 percent of the U.S. credit and debit card business.
Complex fee structures make it difficult to precisely calculate an average interchange rate, but a recent Morgan Stanley report found that a weighted average for Visa and MasterCard interchange had increased from 1.58 percent in 1998 to 1.75 percent in 2004 (an increase of 10.8 percent) and is forecast to grow to 1.86 percent in 2010 (an additional increase of 6.3 percent over 2004 and 17.7 percent since 1998). With the growing use of plastic, the dollar volume of interchange collected has grown from $9.4 billion in 1998 to $17.4 billion (an 85 percent increase) and is projected to reach $32.4 billion in 2010 (an 86 percent increase over 2004 and 244 percent since 1998).
The latest rise in interchange rates came April 1, when Visa and MasterCard imposed a series of significant increases. Some of the new rates are as high as 2.9 percent, particularly for new premium cards. In addition to increasing rates, Visa and MasterCard are urging consumers to move to the higher-rate premium cards and away from lower-rate standard cards.
Banks say they charge interchange to make up for bad debt or fraud. With fraud costs consistently decreasing in recent years, however, the costs interchange is intended to cover aren’t nearly as much as the amount charged, and banks already make huge profits from cardholder interest and fees. Moreover, the coalition believes that much of the fraud that interchange is intended to cover is the fault of banks’ poorly designed card programs, not the fault of merchants.
The coalition is looking at a variety of avenues to help U.S. merchants obtain more reasonable interchange rates. Among other steps, the coalition is examining regulations recently adopted or under consideration around the globe: Australia adopted regulations in 2004 restricting interchange rates, the European Union is adopting restrictions and Great Britain is examining the issue as well. U.S. interchange rates are roughly three times Australian levels.
The Merchants Payments Coalition is made up of trade associations representing retailers, restaurants, supermarkets, drug stores, convenience stores, gas stations, on-line merchants and other businesses that accept credit and debit cards and are concerned about the increasing interchange fees charged by banks and credit card companies to process credit and debit transactions. A number of the associations were involved in antitrust litigation settled in 2003 that forced Visa and MasterCard to lower interchange rates for signature debit transactions.
Coalition members include the American Petroleum Institute, the Food Marketing Institute, the National Association of Chain Drug Stores, the National Association of College Stores, the National Association of Convenience Stores, the National Council of Chain Restaurants, the National Grocers Association, the National Restaurant Association, the National Retail Federation, NATSO (the National Association of Travel Plazas and Truckstops), the Petroleum Marketers Association of America, the Retail Industry Leaders Association and Shop.org. The coalition estimates that interchange collected from its members accounts for about one-quarter of U.S. interchange.