Picking Up the Tab for Payments - By Patricia A. Murphy - STORES Magazine - National Retail Federation, Oct, 2005.
[The National Retail Federation is the world's largest retail trade association and the voice of retailers around the globe].
There’s a battle brewing over the cost of accepting plastic at the point of sale. What’s up for grabs is billions of dollars in fees that change hands between retailers and the banks participating in the Visa and MasterCard payment systems.
The fees — known as interchange — represent the base price upon which merchant POS payment fees are built, and are set at a percentage of every ticket paid using a MasterCard- or Visa-branded credit or debit card. Combined, MasterCard and Visa collected $17.4 billion in interchange fees from U.S. businesses last year, according to the investment firm Morgan Stanley.
At the current pace of change, Morgan Stanley forecasts interchange fees will top $32 billion by 2010.MasterCard and Visa maintain that interchange fees are a legitimate and fair cost of doing business. “While we respect that businesses want to find ways to lower their normal costs of doing business, merchants have many options to improve their economics that do not include costly and time-consuming litigation,” Visa USA vice president Paul Cohen wrote in a statement provided in response to an interview request. “It is disappointing that plaintiffs’ attorneys continue to seek ways to undermine a system that creates enormous value for merchants through increased sales, guaranteed payment and faster, easier transactions.”
Class action lawyers “have latched on to this industry,” says MasterCard general counsel Noah Hanf, who then added this rejoinder: “If you were to ask retailers if they wanted their prices regulated, I’m sure they’d have a very strong view.”Interchange in perspectiveInterchange fees are as old as the bank card system itself, which was devised to compensate the issuer of a MasterCard or Visa card (say, Capital One or Citibank) for the time lag between when the merchant bank is sent funds to cover a credit card purchase and when the cardholder pays, or interest begins accruing on the balance.
Interchange charges also are used to factor in risk and transaction processing costs.But over the years the rationale behind — and the components of — interchange have shifted. “The advent of electronic technologies has been a dynamic change factor,” says Paul Martaus, a Mountain Home, Ark.-based consultant to retail payments companies. “Now it’s all been converted to incentive-based pricing.” Want to see more card transactions in a new or emerging card market? Set interchange at a lower rate for transactions in those markets.
Earlier this year, MasterCard and Visa took incentive pricing to a new level, setting significantly higher interchange rates for payments made with “rewards” cards like the Citibank Advantage card. Interchange on these so-called “premium cards” now runs as high as 2.9 percent.
Complicating matters for merchants is the sheer number of interchange rates currently in effect and the fact that the risk of a transaction’s going bad isn’t particularly high. Whereas 10 years ago there were perhaps a dozen interchange rates with risk as a major differentiator — one rate for cards run through authorization terminals, another when a card number must be manually entered, etc. — today there are scores of rates, and card prestige is what counts.
Merchants complain that there is no effective way to differentiate between customers using rewards cards and those who aren’t — and even if there were, Visa and MasterCard rules preclude merchants from charging different prices to cardholders to reflect differences in payment choices.
“We have to take these cards,” says Mitch Goldstone, co-owner of 30 Minute Photos Etc., an Irvine, Calif., boutique online photography business and a lead plaintiff in a class-action lawsuit filed in June against Visa, MasterCard and several large credit card banks.
“Merchants have little or no ability to negotiate with Visa and MasterCard for lower interchange fees, and these fees are a ‘hidden tax’ that raise prices paid by consumers for almost every product they buy,” says K. Craig Wildfang, a partner in the Minneapolis law firm Robins, Kaplan, Miller & Ciresi and lead attorney in that lawsuit.
Wildfang is no stranger to MasterCard and Visa: In the 1990s, while working at the U.S. Department of Justice, he supervised an investigation that led to a federal court ruling that struck down rules precluding MasterCard and Visa banks from offering American Express and Discover cards.
The pending suit, which Wildfang filed in U.S. District Court in Connecticut, seeks injunctions as well as damages that Goldstone believes could dwarf any previous antitrust settlements. “The remedies we’re seeking could amount to hundreds of billions of dollars,” Goldstone says.
Wildfang expects several interchange-related cases pending against MasterCard, Visa and member banks to be consolidated into a single class action suit.
From obscurity to hot button
Ten years ago, the topic of interchange would have elicited blank stares and little interest from retailers. But that was before the Justice Department took the bank card consortiums to court over bylaws that prevented banks that issued MasterCard and Visa cards from also issuing non-bank cards like American Express and Discover. It was before MasterCard and Visa were made to rescind policies that forced retailers to honor all types of MasterCard and Visa cards (debit as well as credit) if they accepted any MasterCard and Visa cards. That change was part of out-of-court settlements in 2004 between the two associations and a class of retailers, including NRF. Under the settlements Visa and MasterCard also agreed to refund merchants about $3 billion in past overcharges for certain debit card transactions, known as check card payments.
It was before Internet commerce and widespread consumer adoption of electronic payment options like credit, debit and pre-paid cards. It was before governments in other industrialized countries forced MasterCard and Visa to change how interchange gets set, and to allow retailers to surcharge credit card transactions as a means of controlling costs.
Today, interchange is a hot-button issue — so much so, in fact, that there are about a dozen lawsuits pending that assert interchange is tantamount to price-fixing and other violations of federal antitrust law. And there are rumblings that suggest government intervention may be in the offing.Earlier this year, NRF joined with several other business organizations in asking the Federal Reserve to address interchange.
In response to similar questions posed earlier this year by Rep. Deborah Pryce (R-Ohio), chair of the House Financial Services Subcommittee on Domestic and International Monetary Policy, the Fed said that it doesn’t have the authority to regulate interchange. But the industry isn’t necessarily convinced. “The Fed has taken a very conservative view of its authority,” says Mallory Duncan, NRF senior vice president and general counsel. “Debit cards, which are nothing more than plastic checks, are the fastest-growing form of payment.
For years, the Fed has assured Americans that checks pass at face value — that a $100 paper check is worth $100 cash. But if a Visa or MasterCard debit card is used for the same $100 transaction, the recipient only gets $99; banks and credit card companies pocket the difference.“Unless the Fed acts,” Duncan says, “billions of consumers’ hard-earned dollars will be siphoned from their wallets.”
In August, a group representing service stations in western states asked Congress to step in. In a letter to Rep. Caroline Musgrave (R-Colo.), Roy Turner, executive vice president of the Colorado/Wyoming Petroleum Marketers Association and Convenience Store Association, urged help in “lobbying Congress to consider regulation of credit card interchange.”
The letter, published August 25 in Denver’s Rocky Mountain News, stated that interchange is a percentage of the purchase total, “so as fuel prices go up, so does the profit for the credit card companies even though the cost of processing the transaction is the same. These fees are ultimately paid by the consumer and are costing more each year.”
Precedents for government interventionMartaus, the payments consultant, believes federal intervention is a distinct possibility. “If Visa, MasterCard and the card-issuing banks are not incredibly careful, this will become federally regulated,” he says. “It’s becoming too hot an issue.”
Government agencies in other countries have already forced changes in MasterCard and Visa interchange pricing. For the past two years, cost-based interchange has been the rule for MasterCard and Visa banks in Australia, where merchants also must be allowed to add surcharges to purchases made with bank cards.
In a report this summer, the country’s central bank, the Reserve Bank of Australia, reported that interchange had fallen 0.41 percent in two years as a result of the reforms. At about the same time, East & Partners, an Australian consultancy, reported that nearly half the merchants it surveyed planned to start surcharging credit card transactions.
MasterCard’s Hanf says the United States shouldn’t follow the Australian example, insisting those pricing dictates have had an “adverse effect” on credit card payments Down Under. Hanf takes some comfort in a report from Datamonitor, a London-based consultancy, which slams the Australian rulings on interchange. That report, released in May, said: “Consumers are not seeing lower prices at the checkout” and “are also paying more in annual fees for credit cards and loyalty schemes whilst some retailers are now charging a surcharge when a credit card is used.”
Hanf insists regulation is inappropriate. “The U.S. regulatory perspective generally has been not to regulate prices and to let the free market decide,” he says. Pointing to a 1979 federal court ruling that backed interchange, he predicts the pending court challenges to interchange will fail.
Wildfang, however, says that 1979 ruling (National Bancard Corp. v. Visa) was rendered irrelevant by the judiciary’s response to the Justice Department’s successful case against MasterCard and Visa. “Visa and MasterCard have gotten so comfortable with the NaBanco blanket that it’s hard to give it up,” he says.
[Source: STORES MAGAZINE - National Retail Federation, Oct 2005]
