Banks Revise Overdraft Fees, Why Not Interchange Fees Too?

Ron Lieber wrote in The New York Times that JPMorgan Chase and Bank of America have overhauled their debit card overdraft fees.

Read article (9/23).

This has been a multi-billion dollar annual boondoggle for the banks at the expense of millions of consumers.  The larger question is why haven’t the banks also addressed merchant interchange fees – which account for substantially more unfair costs to businesses and consumers? 

It was the public outcry, an NBC Nightly News segment and extensive media coverage on debit card overdraft fees that helped cause this very rapid shift in policy.  It is also being used as a marketing tool, as the credit card issuers can now promote they have waived and adjusted the terms of these overdraft fees to better compete.  However, there is no competition when it comes to merchant interchange fees; retailers are still forced to accept Visa and MasterCard’s terms.  Issuing banks can simply pass along any lost overdraft fees with higher merchant interchange fees, which simply means that ultimately the consumer still gets screwed.

My five-year legal battle as class-representative in an antitrust class-action against Visa, MasterCard and its member banks continues to reap unsubstantiated profits for the credit card companies with even greater costs. 

Merchant interchange fees are an insult that is an atrocity and slap in the face of every consumer and merchant that accepts debit and credit cards.   Along with the banks, which until Visa and MasterCard’s IPO’s controlled one-hundred percent of the two giant credit card associations, are continuing to wage a battle against its customers. If only they listened to their critics addressing these equally excessive charges.

Visa and MasterCard’s Impact From Banking Instability and Upheavel

Another outcome from the global banking crisis, including today’s news that Citigroup will acquire the banking operations of Wachovia, raises added concerns. While the banking industry’s two giant credit card associations want consumers to think that Visa and MasterCard play fairly, do not violate the law and offer boundless competition within the credit card market, the reality is that the banking industry consolidation is yielding an even more unstable and a more tilted playing area. 

Banks are defaulting and being nationalized.  How will this impact their credit card operations and will they attempt to further raise merchant interchange fees in an attempt to strengthen their balance sheets on the backs of businesses and consumers?

After Visa and MasterCard went public in an attempt to shift ownership from the banks, now many of the leading banks are consolidating and their percentage of control is creeping back.  JP Morgan Chase, Bank of America and Citigroup, all named defendants in the Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, are amassing assets and extending their cartel-like market power over the electronic payment system.

Consumers and businesses have lost confidence in the banking industry. Its corporate leaders are under fired, or have been fired. Government intervention at this late hour is doomed and the question remains: why didn’t the government clamp down on the trillions in unstable and ruinous mortgages years ago. A similar question is why did the government permit banks to reap hundreds of billions in anticompetitive and unfair fees at the expense of merchants and consumers?

While the banking crisis is taking all the attention, merchant interchange fees continue to slice away at our nation’s economy.  These fees generate nearly $50 billion each year at the expense of Americans; it removes much needed capital from our economy and is aggressively plundered by the banks as we are learning on the failed housing market and other disastrous schemes.

According to The Wall Street Journal (Sept 29), “Citigroup has put up for sale a Japanese call center valued at about $2 billion, the latest push by the financial conglomerate to drum up fresh capital.”  If the banks are desperately seeking cash, as a merchant, I am extra worried that they will again hit up their interchange pricing fiefdom to  get fast cash at the expense of retailers and consumers. 

WayTooHigh.com: Influencing Opinions and Raising Awareness

Today marks the third year since ScanMyPhotos.com launched WayTooHigh.com – The Credit Card Interchange Report. It is also about the time we received that infamous rate increase letter from Chase Paymentech which was sent to millions of merchants just like us.

Some rates have risen more than 300% in the past few years. The most recent rate “adjustment” letter arrived days ago, but does not identify the new fees until after they take effect. That sympathetic letter from our payment processing service announced a rate increase when cardholders had us process their affinity, frequent-flier signature cards; a quality causing retailers to effectively also be taken on a ride. That was the letter which led to The Wall Street Journal front-page Marketplace profile on our parent company [30 Minute Photos Etc.] and the beginning of our Federal class-action complaint against Visa, MasterCard and international major banks.

Changes have occured over the years. Merchant interchange rates have continued to ascend, while our traditional photographic film business wallowed due to the same technological shifts which made digital more practical.  These are the efficiencies which also helped bring down many antiquated analog services.  Next to film, the yellow page directories, fax machines and thousands of other businesses, the changing times also drew attention to the $40 billion annual merchant interchange debacle which didn’t budge.

But, unlike other businesses that were forced to change, the two giant credit card associations and their 80% market power kept trudging along.  Today, film, phone books and other once shining business models are historic vestiges from an antiquated past.  However, the electronic payment network, which today is super-fast, efficient and liberated from the days of manual credit card imprinters and carbon-copy receipts (that had to be mailed away for processing) remains.When you study the free interchange processing for checks, and international interchange rates that are a third and less the cost in the U.S., you quickly understand that Visa and MasterCard’s game – managed by thousands of member banks – is blemished.  Their anti-competitive price-fixing is illegal and drawing international attention and loud shouts from Washington D.C.

While this website has been written in our voice, as a retailer who best understands the issues, we have also become the leading personality and fixture behind the interchange battle.  And, it continues to gaining traction.  Visa and MasterCard restructured their companies, but the issues and fees remain as do their potential liability.The mix of banks, public relations and legal firms which read our comments each day is shared with close scrutiny by Visa, MasterCard, and much more importantly by other business owners, governments and associations around the world.  From giant multi-national conglomerates to “mom-and-pop” shopkeepers, we have been reporting, sharing commentary and observations with the world community which is also causing grief to Visa and MasterCard.  WayTooHigh.com and the nearly fifty other class-actions suits after we filed the first are shining a knock-down message that time is running out on the cartel’s imposing might.

Many of you have been following the shift in our business too – from film to digital and our extraordinary international media coverage for the new super-fast photo scanning business model we pioneered. From multiple articles in The New York Times, The Wall Street Journal, USA Today and scores of other media coverage, the entrepreneurial passions at ScanMyPhotos.com was successful in making the leap from analog to digital. So, why hasn’t Visa and MasterCard also transitioned from an ancient , cost-based interchange fee structure to one that represents today’s technological realities?

In the late 1980’s technology evolved where transactions were processed electronically and paper records were not needed for most payment card transactions.  Since that time, the costs of various components of credit card transaction processing (phone, data processing and Internet services have decreased significantly.  These changes led to significant reductions in the costs of processing payment card transactions.

As class-representatives, on behalf of the millions of merchants with shared dedicated to eradicating supra-competitive interchange fees, we will continue to engage and call attention to this multi-billion dollar injustice.

News Update From ScanMyPhotos.com

“Carlyle Capital in Default, on Brink of Collapse (via Reuters)

More trouble for the banks.  By way of pure coincidence, Carlyle Group, the buy out firm is in default on ($16.6 billion) – nearly as much money as Visa hopes to raise next week. 

Perhaps they can double-down.  

Can the banks hold on until the Visa Inc. IPO bailout? 

Click here to read the Reuters article.

“[B]anks Also Stand to Shed Some Liability” (The Charlotte Observer)

—————————

According to Christina Rexrode’s Feb 27 The Charlotte Observer article, the thousands of banks that own Visa will adjust their valuation once the adjusted post-IPO market value takes effect.  This means giant windfalls for the banks. 

Abstract of Key Points From the Article

• If the public offering goes through, the banks also stand to shed some liability.
• The banks hope that taking Visa public will get it off the hook in those lawsuits, according to some analysts.
• Gwenn Bezard, research director at Boston’s Aite Group said: “[the banks] are offloading the risk to someone else — investors.”
• Visa will set aside about $3 billion of the money it raises in a stock offering for litigation costs, according to [their filing statements].
• When MasterCard went public in 2006, the lifting of legal liability from the issuing banks was the deal’s main driver, said Eric Grover of Intrepid Ventures. …”Absent the legal liability, I don’t believe MasterCard would have gone public.”   “It’s a bit of a Russian roulette here…”  “If it were to go to trial, there’s a nonzero chance of a catastrophic event.”

[Click here for recent recommendation against MasterCard’s IPO]

Want to know more about lead plaintiff ScanMyPhotos.com?  Click here and read their daily blog: Tales from the World of Photo Scanning

“Visa: Bailing Out The Banks” (NY Times)

Click here to read Floyd Norris, chief financial correspondent for The New York Times’ comments on the Visa IPO and where the use of proceeds would be going. [Read the Visa prospectus]

As entrepreneurs, if we were to seek funding, our investors would require that the proceeds be used to invest in the future expansion of ScanMyPhotos.com, not pay off debt and cover legal bills.  They will also dilute the banks’ ownership if the legal liability is greater than $3 billion; this suggests that Visa is understanding that our liability will be greater than $3 billion.   

If you thought the banks were mismanaged before, due to their mortgage meltdown, the Visa IPO is a study in supra-competitive greed – which is exactly what their interchange fees are all about. 

As with MasterCard, a proportionally large amount of capital will be placed in escrow to cover their legal liability to us.  And, just as with MasterCard, the proceeds will also be used to contribute fresh cash to the banks.   Mr. Norris covered many of the strange maneuvers that Visa Inc is preparing and hoping the public overlooks, due to their intoxication with the MasterCard valuations.  Perhaps the most significant concern is their SEC-filed Risk Factors, and identifying that if our litigation is successful, the giant credit card association risks insolvency.  Insolvency!

We think the reason for the IPO is to demonstrate that Visa is not owned and controlled by the banks; that’s part of our assertion in the antitrust litigation.  So, just as with MasterCard, they paint the appearance that now shareholders are running the show.  Unlike regular publicly held corporations, see what happens if a business tries to acquire a majority of its stock.  See what happens if a company wanted to start from the top floor and buy their own electronic payment card network by acquiring Visa.  They cannot.

As identified in the New York Times article, this is a giant conflict of interest shell game.  JP Morgan Chase is a lead defendant and co-owner of Visa.  They also own Chase and Chase Paymentech Solutions – the credit card processing behemoth.  Yet, the bank is a lead underwriter and we guess already have their track shoes on to make this deal happen super-fast, while the red paint from their impending liabilities are still wet.  Other lead defendants are poised to also cash out in the hundreds of millions of dollars, just as they did (to a lesser level) with MasterCard.  But, not so fast, read this posting about the impending troubles facing MasterCard’s IPO.

“Significant Victory” Announced Against MasterCard by Class Plantiffs

  

 Want to know more about lead plaintiff ScanMyPhotos.com?  Click here and read their daily blog: Tales from the World of Photo Scanning

“Examine Credit Card Reward Offers Carefully (The Wilmington, Del. News Journal)

Excerpt [click here to read article]

Rewards cards aren’t free,” said Emily Davidson, a credit card expert at Credit.com. “Credit card marketers are very, very smart… They make a lot of money just by having you use the card.”

Credit card companies collect interchange fees from merchants every time a card is used, so card issuers profit even when consumers pay the cards off in full each month, Davidson explains.

Interchange Fees are Obsolete as VHS Video Tapes

During the holiday season, look around.  Can you find any VHS cassettes to record television programs on?  How about super-8mm movie film?  8-track tapes?  3 /12″ floppy discs?  Catching on?

Merchant interchange fees are one of the few holdouts from the pre technology explosion, from before TiVo, MySpace, Youtube and the iPhone.  The electronic payment network is today what computer storage devises were years ago.   With consumers increasingly relying on their computers to safe keep their valuable digital libraries, Western Digital’s My Book storage system provides users a safe place to secure up to one terabyte (1 TB) of digital content.  In the mid-1990’s that hardware would cost about a million dollars and fill an entire room, today it is under $500 and is the size of a few cell phones.   With “Moore’s Law”, technology is getting faster and prices cheaper.  Except, when you have unbridled market power and control a system that is obsolete.  It is like a drug addict who only knows how to stay in a daze. 

But, we are awaking Visa and MasterCard and reminding them that their once impenetrable interchange fee fiefdom is on the verge of distinction.  Other countries have got smart and demand rates be lowered, in some cases to a tiny fraction of those fees in the U.S., even though our nation is among the most technology advanced, our communications infrastructure should mean it costs less to transmit data, and third-world fraud rates have to be higher, yet they too pay a tiny fraction of our near record merchant interchange fee prices.  Technology today is so super-fast, just like our high speed ScanMyPhotos.com picture scanning – we cannot help but lower prices. 

Even though the banks are reporting huge problems from its mortgage mess, they would not be allowed to wield their anti-competitive power to artificially hold up what are now obsolete fees to help cover their other mistakes.  We understand that only about 13% of all interchange fees are used to actually cover the transactional costs. 

[Commentary: WayTooHigh.com] 

No Interchange Fee on Gift Cards

Especially during the holiday season speedily encroaching, more retailers are expected to promote their own electronic payment gift cards. Billions will be spend by consumers to purchase plastic gift cards that are unassociated with the electronic payment network.

In parallel to the two leading credit card associations, these cards share many of the same transaction and production costs, yet they are without interchange fees. Just like when writing a check, or using a debit PIN card in Canada, gift cards also abolished traditional interchange fees. 

The retailers understand the value of the cards without imposing those hidden fees that MasterCard and Visa demand.  But, if the card associations challenge our view by explaining that the fees are not hidden – they do post the fees on their website. We challenge them to find a large group of merchants who ever visited those pages and can easily understand the more than one-hundred pages of fees and schedules.

For our business, when a consumer wants a box of 1,000 photos scanned to a DVD, we charge $49.95. Period. ScanMyPhotos.com does not have a hundred page fee schedules. We cannot, after all – we are not controlled by thousands of banks and we do not illegally fix our prices by agreement with others.

Visa® and MasterCard® might argue that their member banks are part of a four-party system, with issuers, acquirers, cardholders and retailers all involved with each transaction. A retailer offering gift cards limit the activities and also much of the expense. However, when Citigroup, JPMorgan Chase and Bank of America, for example, are both the acquirer and issuer, they are getting paid more.  Even realtors selling homes who are on both ends of a residential property sale adjust their fees downward, when they represent both parties.

While gift cards are without interchange fees, the banks are reaping extraordinary windfall profits from an antiquated payment system and because most consumers and merchants are entirely unaware that this is a $30 billion dollar annual scheme which Visa and MasterCard designed, control and are fighting to protect.  And, worst yet. How do most consumers pay for those interchange-free gift cards?  That’s right: with Visa and MasterCard, so the banks garner more windfall profits, even as retailers do not.

“Wall Street’s Money Machine Breaks Down” (via Fortune)

If you thought our more than 800 news and commentary postings provoked outrage against the banks, this Fortune Magazine cover story is remarkable.

We can’t help but think that the giant $40 billion annual merchant interchange piggy-bank will be used to bail out the member banks’ other financial woes.  And, think of the planned Visa IPO and further proceeds that the banks will grab onto as they unload part of their liability and ownership in their giant electronic payment network. 

But, why exactly are they allowed to use these payments which were initially designed to be cost-based, for filling the holes in their breaking levees?

Why Visa, MasterCard and its Member Banks Are Accused of Illegal Price-Fixing by Agreement

We found this very simple defination of price-fixing on the Wikipedia site [click here for more info].

Price fixing is an agreement between business competitors to sell the same product or service at the same price. In general, it is an agreement intended to ultimately push the price of a product as high as possible, leading to profits for all the sellers. Price-fixing can also involve any agreement to fix, peg, discount or stabilize prices. The principal feature is any agreement on price, whether express or implied. For the buyer, meanwhile, the practice results in a phenomenon similar to price gouging.

Methods of price fixing will include selling at a common target price; setting a common “minimum” price; buying the product from a supplier at a specified “maximum” price; adhering to a price book or list price; engagement in cooperative price advertising; standardizing financial credit terms offered to purchasers; using uniform trade-in allowances; limiting discounts; discontinuing a free service or fixing the price of one component of an overall service; adhering uniformly to previously-announced prices and terms of sale; establishing uniform costs and markups; imposing mandatory surcharges; purposefully reducing output or sales; or purposefully sharing or “pooling” markets, territories, or customers.

Generally, price fixing is illegal, but it may nevertheless be tolerated or even sanctioned by some governments at various times, particularly among those whose countries are developing economies. See also Collusion.

In neo-classical economics, price fixing is inefficient: the anti-competitive agreement by producers to fix prices above the market price transfers some of the consumer surplus to those producers and also results in a deadweight loss.

In the United States, price fixing can be prosecuted as a criminal felony offense under section 1 of the Sherman Antitrust Act. ^[1] In Canada, it is an indictable criminal offence under section 45 of the Competition Act. Bid rigging is considered a form of price fixing and is illegal in both the United States (s.1 Sherman Act) and Canada (s.47 Competition Act). In the United States, agreements to fix, raise, lower, stabilize, or otherwise set a price are illegal per se.^[2] It does not matter if the price agreed upon is reasonable or for a good or altruistic cause; or if the agreement is explicit and formal or unspoken and tacit. In the United States, price-fixing also includes agreements to hold prices the same, discount prices (even if based on financial need or income), set credit terms, agree on a price schedule or scale, adopt a common formula to figure prices, banning price advertising, or agreeing to adhere to prices that one announces. ^[3] Although price fixing usually means sellers agreeing on price, it can also include agreements among buyers to fix the price at which they will buy products.

Under American law, exchanging prices among competitors can also violate the antitrust laws. This includes exchanging prices with either the intent to fix prices or if the exchange affects the prices individual competitors set. Proof that competitors have shared prices can be used as part of the evidence of an illegal price fixing agreement. ^[4] Experts generally advise that competitors avoid even the appearance of agreeing on price. ^[5]

Under U.S. law, price fixing is only illegal if it is intentional and comes about via communication or agreement between firms or individuals. It is not illegal for a firm to copy the price movements of a de facto market leader called price leadership, which has been seen to be the case in markets for breakfast cereals and cigarettes. But informal agreements or unspoken agreements to fix price also can violate the antitrust laws. The price-fixing laws apply to industries and professionals, for-profit concerns and non-profits and charities. ^[6] The United States Department of Justice Antitrust Division and United States Federal Trade Commission are responsible for enforcing federal price fixing laws; see also Sherman Antitrust Act. The Department of Justice handles both criminal and civil cases. As of 2004 under US law corporations may be fined up to $100 million for criminal price fixing; individuals can be charged and sentenced to prison sentences of up to 10 years for price-fixing violations. The Federal Trade Commission can prosecute firms for price fixing as a civil matter. Many State Attorneys General also bring antitrust cases and have antitrust offices, such as Virginia, New York, and California. Private individuals or organizations can bring their own lawsuits for triple damages for antitrust violations and also recover attorneys fees.

[Source: Via Wikipedia]