"Banks Fighting Wrong Argument" (WayTooHigh.com)

February 28, 2006

Upon returning from Orlando, where I addressed the International Photo Marketing Association convention and a separate group of executives from a national portrait studio chain, I was immersed in nonstop celebratory cheers for taking on this interchange litigation.

Rather than reveling in the admiration, I was more weary due to a recent WayTooHigh.com posting where a consultant, published in a magazine, argued that the banks need to begin finding a voice to advocate on their behalf. Thus, this was more of an eye in the center of a thunderous storm cloud.

As the banks bunker behind walls fortified by high-paid PR and advocacy experts, I gathered with thousands of real people. No suits and ties, just ordinary retailers, from single-store to giant chains from across the globe. What I encountered at the convention was an endless number of stories about interchange. People were supportive and congratulating me for the antitrust litigation.

The banks had few friends among this group. But, they did when I arrived at the hotel.

By way of coincidence, a major bank, which is also a named defendant, was having a conference there. I kept to myself until I ran into a familiar and dear friend who previously worked at the Eastman Kodak Company. Although his new role as senior VP for that bank caused us to have a brief reintroduction, it was a wonderful opportunity to reminisce and share all the new technologies helping to re-energize the photo imaging business. Sydney, during the Summer Olympics was the last time we saw each other, so, there was much to catch up on.

Toward the end of our chat, I explained that I had some news that might cause some discomfort. I shared my title in the battle against the banks and, like a deer-in-the-headlights, he backed up. The first reaction was more of an impulse because he quipped that me and nearly everyone else are lined up against the banks. But, I then explained my role as class representative and the first to file a legal complaint. When he asked if I was blogging, I explained my additional involvement as co-editor of WayTooHigh.com – The Credit Card Interchange Report.

Being precluded from conversing with defendants, the conversation ended. But not before he tried to explain his bank’s challenge in facing several billion dollars in annual fraud charges and I guess the rational for justifying their interchange fees. With more than two-hundred previous postings, it is clear that the real issue still is not the focus of their argument. The fact of law is that it is illegal to fix prices.

Besides, the fraud rates are lower in the United States than abroad in some nations where the interchange fee is half the rates in the States. As the banks mail out over 5-billion direct mail solicitations each year, you would think they would attempt to limit their fraud exposure by limiting the solicitations so non-credit worthy cardholders would cease adding to the costs shouldered by retailers and consumers. With advanced technology today that wasn’t available when manual credit card imprinters were used this argument is deflated. Seemingly, the banks are treating interchange like a giant roulette wheel – if they loose they have merchants cover their exposure. This strategy sounds similar to MasterCard’s postponed IPO, where the investors could have been burdened with the potential exposure from the legal liabilities too.

We both realized the conversation had come to an end, smiled and wished each other well. And, I still think the world of him because I have always admired his intellectual and compassionate strengths. He was a recognized leader at Kodak and one of the first executives I met years ago who shared my vision for celebrating diversity of people and ideas.

[source: WayTooHigh.com commentary]

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Interchange Fee Battle: Time to Step Back? (BIA Online)

February 22, 2006

Is it time to take the fight over interchange fees out of the courts before it does real harm to the credit card associations and their member banks?

Consultant Steve Mott answered that question with a resounding “yes” on Monday as he warned banks they had better find a voice for themselves, bring this debate out into the open and let cooler heads prevail before ongoing litigation and impending merchant defection to non-bank payment products makes the situation even more adversarial.


Until the issues can be openly and ingenuously examined and thrashed out to the satisfaction of all stake-holders, the prognosis could be calamitous,” said Mott, principal of Stamford, Conn.-based consultancy BetterBuyDesign in a BAI Payments Forum session entitled “Interchange – Where Do the Opportunities and Challenges Lie?

”The battle over growing interchange income from signature-based card products has pushed the associations and several of their member banks into a bruising string of legal battles with merchants. Mott suggested that an independent arbiter – perhaps the Fed – referee an examination of costs and value for credit card payments and “start a process of rationalization before merchants abandon bank networks and products en masse and the pricing of payments plummets below levels from which financial institutions can sustain any profits.”

Mott said interchange levels have grown from 1.2% of purchases in 1990 to 1.75% today and now account for $24 billion in annual profits, which continue to grow rapidly. Card-issuing banks contend they need these fee levels to continue expanding market acceptance and especially to compensate themselves for the resources they pour into increasingly popular rewards programs.

But merchants argue that broad market acceptance has already been achieved – few of them can afford NOT to accept bank cards for payment – and there’s no incremental benefit from rewarding consumers to use particular brands of cards, since most consumers who get the rewards are non-revolvers and therefore don’t need credit to make their purchases.

[source: BAI: Banking Stratagies]

Interchanging Commentary Pending

February 22, 2006

The co-editor of WayTooHigh.com – The Credit Card Interchange Report had been asked to provide the March cover-page commentary in a major financial publication. We will have a link online within a few days.

[Update, 03-01-06. Click here for link]


"Lobbyists Trade Charges of Extortion in Fee Fight" (The Hill)

February 19, 2006

Two high-profile lobbying coalitions traded charges of extortion before a powerful House panel yesterday, dragging their clash over credit cards’ “interchange fees” into the open.

Merchants pay interchange fees whenever a consumer swipes a credit card, with the fee covering credit-card operating costs and guaranteeing card issuers instant, real money to back up the purchase. But merchants have struck back at credit cards and banks, charging the financial-services giants with fixing the interchange fees and asking Congress to slash or eliminate interchange.


Click here to view entire article.

[source: The Hill, The Newspaper for and about the U.S. Congress]


MasterCard ® IPO Delayed

February 16, 2006

What we understood was going to occur before April, 2006, has now been postponed until as late as the end of June. MasterCard, Inc.® announced today that what has turned into a very controversial initial public offering which may raise $2.5 billion will partly be delayed due to a recent medical diagnosis of its president and CEO, Bob Selander. Many we have talked with thought the reason provided minimally was reaching, especially because multi-billion dollar international corporations are bigger than any one person. We continue to speculate that what initially is a postponement, may turn out to be a cancellation as more details on the IPO are understood.

[source: WayTooHigh.com]

Discover ® Debit Card Challenges Visa® and MasterCard ® (Consumer Affairs)

February 16, 2006

By Martin H. Bosworth, ConsumerAffairs.Com

Two recent actions involving the Discover Financial Services company have positioned it to challenge Visa and MasterCard for dominance in the multibillion-dollar credit and debit card market, and have raised the stakes in the battle between banks, merchants, and consumers over the hidden fees involved in using plastic for purchases.

Discover announced that it was introducing Discover Debit, its own debit card brand, to compete with Visa and MasterCard’s debit offerings and increase its profile as a full-service payment company.

In a statement announcing the venture on Feb. 13th, Discover CEO David W. Nelms touted the move as “a highly appealing alternative for financial institutions, merchants and consumers.” “The launch of Discover Debit builds on this with a new, uncomplicated approach to signature debit that provides convenience and broad acceptance to cardholders,” said Nelms, “as well as security and competitive program features to financial institutions.”

Discover touted its new card as offering more attractive features than the competition, including zero liability in case of fraud, clear pricing and billing rules, and better security.

Most attractive to merchants, however, was Discover’s announcement that it would be dropping its “No Surcharge” rule when processing merchant transactions.

The “No Surcharge” rule prevented merchants from passing the costs of card transactions on to consumers via tacking on extra fees. Merchants, in turn, have to pay higher “interchange” fees when processing card transactions, and end up making less money than when customers pay cash.

Discover Financial agreed to drop its “No Surcharge” rule in negotiations over a merchant-backed class action suit against the rule, and was dropped from the suit.

Leveling the Playing Field

Discover’s actions are a direct challenge to Visa and MasterCard’s dominance in the credit and debit market, coming at a time of increasing consumer awareness of the “hidden fees” they pay to use credit and debit cards.

The “No Surcharge” class action suit is being combined with a separate class action suit challenging Visa and MasterCard’s control of interchange fees for merchants.

Photo shop owner Mitch Goldstone is one of the principal litigants in the interchange fee lawsuit. He hailed Discover’s dropping of the “No Surcharge” rule as a smart move, and predicted that “Discover Financial is poised to garner substantial support from merchants and consumers.”

Goldstone has repeatedly targeted Visa and MasterCard for what he has called “illegal price fixing,” through setting excessive processing fees that merchants have to pay when customers use plastic instead of cash. “While Visa and MasterCard have their heads in the sand, Discover made a brilliant marketing coup which is getting noticed by retailers and cardholders, ” Goldstone said.

Discover Financial is owned by New York-based securities and investment firm Morgan Stanley. The firm recently agreed to pay $15 million as part of a settlement with the Securities & Exchange Commission (SEC) for failing to retain e-mail records of its activities.

[source: ConsumerAffairs.com]

Lawmakers Hear More Interchange Arguments (Cardline)

February 16, 2006

Representatives of retailers and electronic payment groups testified for and against government interchange restrictions before the U.S. House Subcommittee on Commerce, Trade and Consumer Protection today.

Henry O. Armour, president and CEO of the National Association of Convenience Stores, testified that convenience store owners see a few basic operating rules when they sign agreements with acquiring banks to accept Visa and MasterCard but are kept in the dark about most rules until they break them and receive chargebacks or higher interchange fees.

For example, contracts merchants sign with acquirers stipulate that they aren’t supposed to set minimum or maximum purchase amounts for credit card use, but the full operating agreements that they aren’t allowed to see include maximum purchase limits for gasoline. Those hidden rules lead to chargebacks, he said. “The merchant can’t restrict, but Visa and MasterCard reserve the right not to pay you if it’s over $50 [for gasoline],” he said.

Armour wants the subcommittee to press Visa and MasterCard member banks to provide full copies of operating rules to lawmakers studying interchange fees. He said retailers in the U.S. should see lower interchange fees than elsewhere, since they generate the most transactions in the world and maintain one of the lowest fraud rates.

Edward Mierswinski, consumer program director of the U.S. Public Interest Research Group, advocated more studies of merchant and cardholder rules, interchange and how interchange cost is shared by consumers. “I personally don’t think that Joe Cash Customer, who can’t afford a bank account, should be paying for Jane Frequent Flyer Miles,” he said. “The rules [issuers] give to consumers are ‘we can change the rules any time we want for any reason, including no reason.'”

Representing the Electronic Payments Coalition, former Federal Trade Commission Chairman Timothy J. Muris, now an attorney with O’Melveny & Myers LLP in Washington, called merchant claims of price fixing disingenuous. “What the merchants want instead is a price fix, but a price fixed at a lower amount,” Muris said. He also argued that individual retailers negotiate a variety of interchange fees with their acquiring banks, so prices aren’t really fixed.

Ranking minority member Rep. Janice Schakowsky (D-IL), appeared to agree with Armour and Mierzwinski that interchange fees are too high and affect consumers adversely. “Whatever the courts decide, I think it’s our committee’s responsibility to make sure that consumers are not saddled with more fees.”

Others, such as Rep. Michael Ferguson (R-NJ), expressed a general distaste for price controls. “I’m suspicious of governments telling markets how much to charge,” Ferguson said. Most committee members who spoke seemed sympathetic to, or at least intrigued by, Armour’s assertion that retailers should have more complete access to the rules that govern their interchange fees and chargebacks and be able to freely communicate card costs to customers. “I believe in transparency, so consumers can decide what [payment methods] are right for them,” Ferguson said.

[source: Cardline]