Ongoing Battle Over Interchange Fees
Credit card issuers opposed to additional legislation…
A renewed battle is on the horizon over $48 billion in fees that credit card issuers collect from merchants, with lawmakers pursuing more legislation. The focus is on bringing down interchange fees, the fee charged to retailers on every purchase made with a credit card which is split between the bank serving the customer and the bank serving the merchant. Interchange fees account for 19% of revenues last year for card-issuing banks associated with Visa or MasterCard. Interchange fees associated with these networks tripled from about $16 billion in 2001 to $48 billion last year.
The debate pits credit card companies like Visa and JPMorgan Chase against large corporations like Target and Wal-Mart. Interchange fees are the second highest cost, only topped by payroll. Merchants want to negotiate lower payments without running afoul of antitrust laws. Larger retail chains, restaurants and small businesses support the new rules, effectively lowering the rates which they say erode their profits and inflate consumer prices. Merchants contend the fees unfairly cut into their margins and drive up prices for consumers. Banks argue that the 50-year-old electronic payments system is efficient and based on a pricing system that benefits businesses and their customers.
Introduced by Congressman Bill Shuster (R-PA) and House Judiciary Committee Chairman John Conyers, Jr. (D-Mich.) HR 2695, the Credit Card Fair Fee Act of 2009 would allow merchants to collectively negotiate with banks for the cost of certain credit card fees, and ultimately reduce the costs of everyday goods for consumers. Card networks and lenders would also be required to disclose components of the fee and how banks share the money.
Ken Clayton, senior vice president for card policy at the American Bankers Association in Washington, said merchants want the benefits of electronic payments with none of the cost or risk. “Merchants don’t want to pay their share of the interchange system and they want consumers to pay it instead,” said Trish Wexler, spokeswoman for the Washington-based group. “Stores get enormous value,” Clayton said. “They don’t have to worry about fraud, and consumers buy more. The entity on the hook is the bank.”
In a typical transaction, the merchant’s bank deducts 1.9% from purchases, known as the merchant discount rate. This fee is split between the card issuer and the merchant’s bank, with the larger portion going to card issuer, known as the interchange fee. According to JPMorgan analyst Tien-tsin Huang, the interchange fees average 1.7%. Visa and MasterCard get paid a processing fee from each bank of 15 to 18 cents on a $100 purchase, Huang said.
Wal-Mart backs the new legislation, “In every other aspect, merchants have the ability to negotiate and reduce their costs except this one,” said Jennifer Hatcher, spokeswoman for the Arlington, Virginia-based institute. Target lacks leverage because it’s “simply not realistic” to stop accepting credit cards, said Eric Hausman, a spokesman for Minneapolis-based Target. “This is a significant issue for Target, as interchange fees are the second-highest company cost, only exceeded by payroll,” he said.
The limits would be added to rules signed into law on May 22 by President Obama that curtailed consumer fees and interest-rate hikes, which issuers and analysts say crimp profit.
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