Thursday, January 11, 2007

Why Interchange Fees Concern Retailers and Consumers (commentary:

Having just returned from the International Consumer Electronics Show in Las Vegas, there were several instances where I felt more like a rock star than an entrepreneur at the world's largest consumer technology trade event. There were lots of smiles and thumbs-up from those who were familiar with my role as lead plaintiff in the merchant interchange litigation. Business owners and even consumers were in our camp. Several people I ran into shared their own horror stories.

For me, the point of excessive interchange fees hit home during Michael Dell's Tuesday keynote presentation at the Venetian Hotel. At one point, he had "Doctor Evil," the character from the Austin Powers films appear on stage after a 30-year deep freeze. Doctor Evil showed Dell Computers' founder his 30-year-old computer and wanted to get his "crap" off the antiquated machine; Dell was introducing new products to preserve files stored on older model computers. I couldn't help but draw several analogies about credit card fees and the differences in technology and higher fees than from three decades ago when antiquated manual card imprinters were used.

As a speaker at CES, I addressed the future of the photo imaging industry, but throughout the show, many people I met were familiar with our litigation against Visa®, MasterCard® and its member banks. CES was not a very friendly place for the card associations, especially because it united retailers and ordinary shoppers together; both are impacted by these fees.

One observation I raised was how ironic it was that the nation's largest trade show just celebrated its 40th anniversary - it was founded in New York City in 1967. While the bulk of the products promoted at the show will be purchased with Visa or MasterCard (they control 80% of the market), the two leading card associations operate in a 1960's type-fee structure. Back then we were in a paper economy, today with technology, everything is digital, yet Visa and MasterCard's price structure is based on costs from 40-years-ago.

Click here for previous "Credit Card Interchange Fee Draw Criticism and Concern at CES" press release.

Overview of Interchange Issues:
  • Interchange fees have more than doubled in the last 10-years.
  • Few customers know about interchange fees because it is virtually impossible for merchants to tell customers what the exact fee is.
  • Every consumer pays for these hidden credit card fees, even cash customers because the cost is built into every product - a gallon of milk bought with cash by a mom is also paying to award premium signature card holders' bonus mileage to Europe.
  • Interchange fees are one of the worst and most unfair fees paid by American consumers - it's more than six times what people paid in ATM fees.
  • Visa and MasterCard control an 80% market share of the card market and control a system that is anti-competitive.
  • Visa and MasterCard threw a bone to service stations and motorists last fall, after the peak summer driving season by capping fill-up interchange fees at $50. This was a hollow gesture and not very genuine, especially as fuel costs have recently subsequently plunged.
  • Huge profits: Even though the actual cost to process a $1 transaction is virtually the same as that of a $10,000 transaction (buy a soda or a Cartier watch), the interchange fee is based on a percentage of the total. Even Realtors lowered their take when housing prices soared. The interchange fees are far higher than the actual cost o the transaction they are meant to pay for. The technology used to process credit card transactions are today more efficient and less expensive.
  • Why are interchange rates higher in the U.S. in most other industrialized nations? U.S. interchange fees are close to 2%, while other countries, like the UK are typically 0.7% and Australia averages 0.55%.
  • Did you know that merchants are forbidden from disclosing to consumers the fees that are charged?
  • Behind closed doors, Visa and MasterCard meet to increase these anti-competitive hidden fees. We understand that these price-fixing practices are in violate antitrust laws.
  • Few things are more anti-competitive than the credit card market - virtually every other marketplace lowers prices because of competition.
  • Study the market dynamics of other counties with significantly lower interchange rates to understand that the banks and card association are still doing well and they have not experienced disruptions in transaction handling processes, despite lower rates.
  • The banks which make up Visa and MasterCard have colluded to set these fees which in any other industry would be a clear violation of federal antitrust laws
  • With a new consumer-friendly House, it will be interesting to see what actions Congress and the Senate might take in the coming months. [The Senate may launch a hearing of its own and we certainly would welcome an opportunity to share our retail and ecommerce experiences].