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Congress Takes On Credit Card Interchange Fees

Bill would let merchants negotiate fees with card companies

By Martin H. Bosworth
ConsumerAffairs.com

March 7, 2008

• Credit Tips And Tricks • Get Control of What You Owe • No Easy Way Out Of Credit Card Debt • Penalty Fees, Interest Rate Hikes, and Misleading Contracts Await Credit Card Shoppers • "Convenience Checks" Carry a Heavy Price Tag • New Forms of Credit Scoring • Understanding Credit • Credit Bureaus: Who You're Dealing With • Reading Your Credit Report • Credit Scoring: The Fickleness of FICO • Credit Knowledge: A Long, Hard, Struggle --- News • Credit Cards Giving Consumers Heartburn • Obama Signs Credit Card Bill • Olive Garden Settles Credit Card Data Exposure Suit • Video — Credit Card Law May Produce Unintended Consequences • Senate Overwhelmingly Approves Credit Card Reform • Obama Presses Case For Credit Card Reform • Obama Wants Credit Card Legislation This Month • Americans Turn Away From Credit Cards • Credit Card Bill Passes House — Again • Credit Card Losses Spike in February • More Students Using Plastic to Pay for College • Federal Court Reinstates Credit Card Suit • Senate Committee Approves Credit Card Accountability Act • Debt Settlement Comes With Hefty Fees • Credit Card Reform Comes Back To Congress • Credit Card Rates on the Rise • Credit Card Pitches Fall Sharply • Experian To Stop Selling Credit Scores To Consumers • Class Action Filed Over Chase Credit Card Fees • Consumer Credit Plunges Record Amount in November • Consumers Resolve To Kick Credit Card Habit • Credit Card Issuers Changing the Rules --- • More about credit cards

For years, retailers and merchants have been waging a quiet war with the financial industry over "interchange fees" -- the hidden costs of processing credit and debit card transactions that can wipe out a store's profits while earning banks a pretty penny.

Now Congress has stepped into the fracas with new legislation that would enable merchants to negotiate the fees they pay for taking plastic.

The "Credit Card Fair Fee Act of 2008," introduced by House Judiciary Committee chairman John Conyers (D-MI), would require lenders possessing "substantial market power" to negotiate with merchants and retailers on terms for fees paid when processing card transactions.

If a voluntary agreement cannot be reached, both sides would have to submit to binding arbitration overseen by the Justice Department and the Federal Trade Commission (FTC).

"This legislation is intended to give merchants a seat at the table in the determination of these fees," Conyers said. "It is not an attempt at regulating the industry and does not mandate any particular outcome. This legislation simply enhances competition by allowing merchants to negotiate with the dominant banks for the terms and rates of the fees."

Utah Republican Chris Cannon, who co-sponsored the legislation, said that the bill was designed to reinforce transparency and competition in the credit card industry, two principles key to what he called "the greatest economic system in the world -- free-market capitalism."

"The current system of setting fees that merchants pay for credit card transactions is anti-competitive and secretive," he said. "This bill does not set prices. Instead, it would require that fees be set in a transparent manner so other companies can compete for business and consumers would not pay artificially high rates."

Consumers are generally unaware of interchange fees, as they are folded into the total price of items bought and are not disclosed on receipts. But merchants are acutely aware of the fees, as they force storeowners and retailers to raise prices on all their items in order to make a profit, effectively penalizing customers who shop only with cash and don't pay fees of any kind.

$350 per family

Interchange fees cost the average American family $350 per year, according to statistics from the National Retail Federation (NRF). Americans pay interchange fees of two percent on all transactions made with plastic, higher than any industrialized nation in the world.

Visa and Mastercard kept their interchange fee structure hidden for many years, preventing merchants from accurately gauging how much they are really paying, and leading a group of merchants to file a class-action lawsuit demanding changes to the system. Both Visa and Mastercard have since published their fee breakdowns, although critics charge the structures are still too complex for anyone to understand.

Both Visa and Mastercard have set aside considerable war chests to pay for the potential costs of losing the litigation, and have committed to massive initial public offerings (IPOs) in order to defray more risk onto shareholders.

Retailers testified to Congress in July 2007 on the hidden penalties of interchange fees, and today welcomed the new legislation. "This legislation would use the nation's antitrust laws to rein in the greed of the credit card companies," NRF senior vice-president Mallory Duncan said.

"Rather than allowing these fees to continue to be set in secret and imposed on a take it or leave it basis, this legislation would require negotiations and allow retailers to seek fair terms and conditions that will ultimately mean a better deal for consumers," Duncan said.

"Consumers are already angry at the way they've been treated by credit card companies, and this bill is an important step toward making credit card companies treat both merchants and their customers with respect."

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