Fed Reserve: “Interchange Fees and Payment Card Networks: Economics, Industry Developments, and Policy Issues

Finance and Economics Discussion Series

Divisions of Research; Statistics and Monetary Affairs

Federal Reserve Board, Washington, D.C. Interchange Fees and Payment Card Networks: Economics, Industry Developments, and Policy Issues

Robin A. Prager, Mark D. Manuszak, Elizabeth K. Kiser, and Ron Borzekowski

Click here to view

Overview:

In many countries around the world, electronic card-based payments have been replacing older types of payments at a rapid rate. In the United States, use of both debit cards and credit cards has been rising rapidly, while check volumes have been declining.

The increased use of electronic payment methods has generated a number of public policy debates. One prominent debate concerns interchange fees. This paper is intended to provide background for understanding the interchange fee debate. The paper describes the operation of a typical payment card system, presents a summary of the economic theory underlying interchange fees, and discusses various developments in the U.S. payment cards industry, as well as legal and regulatory developments abroad.

The paper concludes with a discussion and critical evaluation of a number of potential policy interventions.

Interchange fees typically involve a payment from a merchant’s bank to a card user’s bank for each debit card or credit card transaction, are determined at the network level, and are the same for all banks participating in a network. These fees are generally passed through to merchants by their banks and comprise a large fraction of the fees that merchants pay to their banks for processing card transactions. Card-issuing banks often use a portion of their interchange fee revenue to encourage card use by offering their cardholders rewards, such as cash rebates or airline miles, that increase with card use. In recent years, increases in interchange fee rates, together with growth in the volume of card transactions, have led to a dramatic rise in the total value of interchange fee payments and, consequently, in merchants’ cost of accepting payment cards. These cost increases have given rise to significant concerns among merchants.

Electronic Payments Coalition Opposes Chairman Conyers Interchange Legislation

[source: Electronic Payments Coalition, press release, June 4.  Note: EPC is the advocacy component, controlled by credit unions, banks and payment card networks (MasterCard and Visa)].

Merchants Want Consumers to Foot the Bill for Their Costs of Accepting Credit and Debit

WASHINGTON, June 4 /PRNewswire/ — The Electronic Payments Coalition issued the following statement in response to the interchange legislation introduced today by Congressman John Conyers (D-MI):

“The Electronic Payments Coalition strongly opposes interchange legislation introduced today in the U.S. House of Representatives by Rep. John Conyers (D-MI) – a bill nearly identical to one that received broad bipartisan opposition last year.

This legislation is an attempt by giant retailers to make consumers pay for one of their business expenses – the cost of accepting credit and debit. It’s simple: merchants do not want to pay their fair share to accept debit and credit cards, and they want consumers to foot the bill.

If this legislation passes, American families will end up footing retailers’ bills when it comes to accepting debit and credit cards.

 Merchants that accept credit and debit cards benefit from more sales, lower costs and greater profits. It is only fair that they pay a fee for this service.

At a time when American families everywhere are struggling to make ends meet, they shouldn’t be forced to pay more so giant retailers can profit at their expense. We understand that every business wants to find ways to cut overhead costs for valued services, but forcing consumers to pick up the bill for giant retailers just isn’t fair.

Consumers pay their bills. Giant retailers should pay theirs, too. On behalf of every American consumer who pays his or her own bills, the Electronic Payments Coalition urges Congress to oppose this harmful legislation.”

MasterCard: Legislation Would Let Merchants Keep the Benefits of Card Acceptance But Make Consumers Pay the Price

[source: MasterCard Worldwide press release, June 4]

Purchase, NY, June 04, 2009 – MasterCard said today that legislation introduced today by U.S. Rep. John Conyers (D-MI), by exempting merchants from antitrust laws, would take away the fundamental protections that these laws provide consumers. This would result in less credit availability, along with higher prices and reduced benefits when Americans choose to use their credit or debit cards. Antitrust laws are designed to protect competition and consumers, but this bill would have the opposite effect.

Conyers’ legislation, H.R. 2695, would give merchants a special exemption from antitrust laws enabling them to engage in anticompetitive and collusive behavior when establishing the fees and terms applicable to accepting payment cards. The bill is part of an organized merchant campaign to shift their card acceptance costs to consumers, and does not require merchants to pass on any savings to consumers if they succeed in lowering these fees.

When similar legislation was considered last Congress, it stirred considerable controversy and was only narrowly approved by a deeply divided Judiciary Committee. In addition, a wide array of organizations from non-profits to community banks and credit unions to minority small businesses voiced their opposition. The Department of Justice also expressed concern about the bill indicating that its antitrust exemptions “would appear to be the type of naked collusion that the antitrust laws condemn as per se unlawful because such conduct lacks plausible benefits to competition.”

Experience demonstrates that consumers lose when merchants no longer pay their fair share for the valuable benefits they receive from accepting payment cards. This is precisely what happened in Australia when the government reduced interchange fees. Although it cut costs for merchants, many Australian consumers now pay more for their payment cards and receive less in return as a result of the government’s intervention. Furthermore, there is no evidence that merchants reduced prices for consumers as a result of the government’s intervention.

Both merchants and consumers benefit from the ability to use and accept electronic payments, and in today’s free market system, each pays a share of the cost of the service. The benefits and the cost of card payment services are now shared between merchants and consumers but the merchants behind the Conyers bill seek to retain the benefits while shifting the costs to consumers.

Finally, MasterCard noted that any serious discussion of these issues should wait for the results of the Government Accountability Office (GAO) study ordered by Congress as part of the Credit CARD Act. Consumers stand to be severely damaged by government intervention and the findings of the GAO study may help avoid consumer harm that inevitably flows when merchants no longer pay their fair share for the benefits they receive.

MasterCard Merchant Interchange Fee Comments

On the MasterCard Worldwide website, the credit card giant has a posting and disclaimer about merchant interchange fees that is very interesting.

Interchange rates and fees are established by MasterCard and are generally paid by financial institutions called “acquirers” that provide card acceptance services to merchants. Acquirers pay these fees to card issuers. Interchange rates/fees are only one of the many cost components of the Merchant Discount Rate (MDR) that is established by acquirers and paid by merchants in exchange for card acceptance services.

Please note that MasterCard is not an issuer and has no involvement in acquirer/merchant pricing policies.

While MasterCard is not a card “issuer,” the giant credit card company is attempting to distance itself from the merchant interchange antitrust litigation by suggesting they are not involved in pricing policies. That is what this antitrust litigation is about –  price-fixing. At the time the lawsuit was filed, which I am a lead plaintiff in, MasterCard was entirely owned by its member banks.  While MasterCard may claim it is not involved with “pricing policies,” it was its board members (the banks) that collectively set the fees; many of those board members were also controlling Visa as well.

Credit Card Fair Fee Act Reintroduced

MasterCard’s response to Credit Card Far Fee Act is wrong. They (the credit card issuers) ALREADY are making less credit available, forcing higher rates and cutting benefits.

The Electronic Payments Coalition claims that the Credit Card Fair Fee legislation is aimed to help giant retailers. ScanMyPhotos.com is not a “giant retailer,” we are just like millions of other merchants and small businesses that are battling Visa, MasterCard and its member banks over illegal anti-competitive price-fixing of their merchant interchange fees.

NACS Applauds Re-Introduction of Credit Card Fair Fee Act

WASHINGTON — NACS applauded the reintroduction of the “Credit Card Fair Fee Act,” bipartisan legislation introduced today by House Judiciary Chairman John Conyers (D-MI) and Representative Bill Shuster (R-PA) that seeks to address the more than $48 billion that Americans annually pay in credit card swipe fees.

Similar to legislation introduced last Congress by Chairman Conyers and supported by NACS, the bill, H.R. 2695, seeks to help level the playing field for retailers by giving them a seat at the negotiating table with banks to determine the fees assessed for every sale made by credit card, and ultimately reduce the costs of everyday goods for consumers.

Credit card swipe fees — called “interchange fees” by the big banks that set these rates — are a percentage of each transaction that Visa and MasterCard and their member banks collect from retailers every time a credit or debit card is used. These fees average about 2 percent in the United States, the highest rate in the industrialized world.

In 2008, credit card fees cost U.S. convenience stores $8.4 billion — compared to only $5.2 billion in store profits, according to NACS data. Almost all of these credit card fees are attributable to credit card swipe fees.

Currently, credit card swipe fees are set in secret by the banks and hidden from view. Raising these fees is how Visa and MasterCard — which together control more than 80 percent of the U.S. credit card market — encourage banks to issue more credit and debit cards.

“We are delighted that Congress is taking a closer look at these outrageous fees on the heels of its reform of the credit card industry’s abusive lending practices,” said NACS Chairman Sonja Hubbard, CEO of Texarkana, Texas-based E-Z Mart Stores. “Now it’s time to address the rest of the credit card industry’s abusive practices.”

“Right now swipe fees are fixed by the banks, hidden from the public and forced on retailers in a take-it-or-leave-it offer,” said Hubbard. “The Credit Card Fair Fee Act would allow retailers and the card associations to negotiate on equal footing, and we applaud this bipartisan effort to make it happen,” she said.

Over the last several years, the public, consumer groups, the Federal Reserve and Congress have scrutinized unfair credit card practices, policies and fees. Swipe fees have been the subject of multiple hearings in both the House and Senate under both the Republican and Democratic Congresses, and the banking industry has intensely lobbied against any reform — something it continues to do.

“It is simply outrageous that the banking industry — which received hundreds of billions of dollars in taxpayer-funded bailout money — continues to spread fear and misinformation in their lobbying efforts,” said Hubbard. “The bottom line is that unless Congress fully addresses how credit card swipe fees are determined, and why they are set in secret and hidden from consumers, the banking industry will have free reign to establish higher rates and create new hidden fees that continue to punish Americans,” she said.

[source: NACS]

CBSNEWS.Com More Credit Card Rate Hikes