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Merchants Testify Before Congress on Credit Card Price-Fixing

By Martin H. Bosworth
ConsumerAffairs.com

April 8, 2005

Credit Card Fees • Visa, Mastercard Settle Suit With West Virginia • House Studies Credit Card Fees • Retailers Fret Over "Swipeless" Credit Cards • Visa Publishes Interchange Fees For Credit Cards • MasterCard Offers Concessions In Interchange Fee Battle • Merchants Testify Before Congress on Credit Card Price-Fixing • MasterCard IPO Shifts Risk from Banks to Investors • Thanksgiving: A Day Without Credit Cards? • Credit Card Companies Rocked By New Merchant Lawsuits • Merchants Sue Credit Card Issuers Seeking Lower Fees • Suit Challenges Credit Card Fees

A coalition of merchants and retailers testified before the Senate Judiciary Committee on charges that Visa, MasterCard, and banks that partner with them have colluded to set unreasonably high "interchange" fees for credit and debit transactions.

The Merchants Payment Coalition (MPC) representative, lawyer Stephen Cannon, told the Committee that "interchange acts as a hidden sales tax on U.S. commerce, raising both merchant costs and ultimately the price of goods and services sold to consumers."

Interchange fees are the costs of processing transactions made with credit and debit cards. When a shopper pays for something with a credit or debit card, the retailer pays the bank an "interchange" fee to process the transaction.

Using plastic to buy small items such as food can end up costing the merchant more than any profit they could make from the sale, due to the high cost of the bank fee.

Cannon stated that banks and credit card companies colluded to set high interchange fees in order to ensure merchants would not be able to negotiate lower prices. The ubiquitous nature of credit-based transactions prevents merchants from not using them, he said, and consumers are enticed to use plastic in order to earn benefits like rewards points and "cash back."

In order to earn profits on goods bought with plastic, merchants have to raise prices on everything, even when customers buy with cash or check.

"The higher cost to merchants for customer use of payment cards flows through into higher prices for the customers of those merchants. Interchange fees thus become a cost borne by all consumers whether they use cards or not," Cannon said.

The MPC is part of a group that filed a series of lawsuits against Visa, MasterCard, and banks that issue their cards, including Bank of America and Citibank, on charges of violating antitrust law. The lawsuits were consolidated into one massive class action suit, which is currently pending.

Online photo vendor Mitch Goldstone, a lead plaintiff in the suit, told ConsumerAffairs.com that, "With today's Senate Judicial hearing, this is an important day for every merchant and consumer. It signals the beginning of elevated national attention for what is a $30 billion annual hidden tax on consumers and retailers."

MasterCard CEO Robert Selander addressed shareholders on Tuesday, July 18th, regarding the company's massive initial public offering and its strategy for facing the lawsuits against it.

Selander said that the company wasn't going to be settling the merchant lawsuits in the immediate future, and that he would not risk shareholder funds to offer a settlement.

Skeptical analysts believed that MasterCard's IPO was chiefly designed to reduce the company's liability in the event that the shareholder lawsuits are successful. The company raised $650 million from its IPO for a "war chest" to fund the anti-lawsuit effort.

In a statement, ranking Senate Judiciary member Patrick Leahy (D-VT) said that "Credit cards do bring many benefits to both retailers and consumers ... But we need to be sure that the cost of accepting credit and debit cards does not outweigh the many possible benefits businesses and consumers should be enjoying. We need to bring more transparency to the entire system. We need to take a closer look."

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