Inconsistencies Abound at Interchange Hearing
By Mehgan Belanger
WASHINGTON -- During yesterday's first hearing of the House Judiciary Committee's Antitrust Task Force on interchange fees charged by credit-card companies, witnesses selected to testify -- among them members of the retail community, a consumer group, a small bank and a credit-card industry consultant -- presented opposing facts regarding the fees that banks charge merchants for accepting credit-card payments.
In fact, Ric Keller, a member of the Task Force, listed a number of inconsistencies that were expressed by retailers and members of the banking and credit industries.
For instance:
-- Retailers say they cannot view operating rules, while financial representatives say they disclose their rules online and retailers are free to view them;
-- Retailers claim they are not allowed to offer discounts for cash transactions, while financial representatives state that retailers can use cash discounts, post them and even advertise them in their stores;
-- Supermarkets retailers state they have no bargaining power, that it is a "take it or leave it" policy on credit cards, while financial representatives said retailers have many options for taking cards, and cited such retailers as Costco, Sam's Club and Neiman Marcus, all of which accept limited brands of credit cards.
-- Retailers claim that when interchange rates increase, it hurts consumers because retailers pass on the costs, while financial representatives said consumers benefit from the increased rewards and other benefits that come with being a cardholder; and
-- Retailers want competition and a free market for setting interchange fees, not price fixing, while financial representatives said retailers want to fix the price of interchange.
One witness testified that consumers can't be educated about what they have to pay as a result of interchange fees because retailers can't discuss the rules with them. The rules governing merchants who agree to accept a brand of credit card prevent merchants from informing consumers about the cost of payments, said Edward Mierzwinski, the consumer program director for U.S. PIRG, a consumer interest group.
In addition, interchange rates are "privately regulated by card company rules that will not be made available to this, or any other committee," noted Mallory Duncan, senior vice president and general counsel of the National Retail Federation (NRF) and chairman of the Merchants Payments Coalition (MPC).
Cash Discounts
Regarding the cash discounts, Duncan argued that it was not possible for all retailers to offer a lower price if customers pay with cash. "You'll see it at a gas station because they only have three products -- regular, mid-level and premium -- and so there, it's conceivable that you could offer a lower price for cash. But even when you have that option, they are trying to stop us from doing that," he said, citing an incident that occurred at a San Francisco gas station where the owner offered a cheaper price for cash purchases, but Visa went to the station and said it could not offer such a discount.
Take it or Leave it
Representatives from the banking and credit-card industries argued that retailers had options to decrease the impact of interchange fees, including not accepting credit cards or accepting a limited number of card brands that have lower interchange rates.
"Merchants can do lots of things," said John Buhrmaster, president of First National Bank of Scotia, N.Y. He cited Costco, Sam's Club and Neman Marcus as retailers that limit the brands of credit cards accepted. Also, merchants can offer, advertise and post signs in stores for cash discounts and can steer customers to debit card payments, which are cheaper, Buhrmaster told the House Judiciary Committee.
However, merchants at the hearing stated that was not an option.
"There is no negotiation with credit-card companies, it's a take it or leave it," said Steve Smith, chairman of the Food Marketing Institute and president and CEO of K-VA-T Food Stores in Virginia. "If we chose not to accept credit cards, we're turning our back on 60 percent of transactions. It's not inviting to tell customers 'no.' We don't mind taking credit cards. What we want is a fair fee to be charged to retailers."
Free Market
Smith recalled, "The initial volume of card payments was low and quite honestly, our industry thought the rate changes would fall as transaction volume increased. This would be consistent with basic economic theory and various other aspects of our business. However, the exact opposite has proved true," he said. The grocery industry now faces an fee upwards of 2 percent -- nearly double K-VA-T's profit margin, he noted.
He continued: "We're not lobbying to deny the credit-card companies from their reasonable profits, we only ask that we not be faced with costs imposed on us that were set collectively by card systems and their member banks in an environment that is deliberately designed to deprive America's merchants of any freedom of competitive action. … And the great shame of it, my friends, is that the consumer bears the cost and this fact has been effectively hidden from them."
Tim Muris, of Counsel O'Melveny & Meyers, argued that the credit-card industry is expensive to operate. "The simplicity of credit cards belies a complex technological infrastructure that supports these transactions, and costs billions of dollars [to operate.]"
He also stated that retailers are incorrectly labeling interchange as price fixing. "The end of interchange would lead to chaos, the merchants understand this. They don't want interchange to end, the just want to pay less. They argue against card setting interchange rates. That isn't an antitrust remedy. If so, the market, not the government, would set interchange."
Duncan, of the NRF and MPC, countered by noting that "The two cards [Visa and MasterCard] operate as a price-fixing cartel, a clear violation of antitrust rules."
To solve the problem of interchange fees, Mierzwinski suggested making the interchange policies more transparent. "The first step is sunlight, the best disinfectant," he said.
Yesterday's hearing was the first of several the committee plans to hold.
John Conyers Jr., chairman of the task force, concluded, "Solutions to this problem are few and far between. This is going to test the skills and competency of this Judiciary Committee a great deal."
WASHINGTON -- During yesterday's first hearing of the House Judiciary Committee's Antitrust Task Force on interchange fees charged by credit-card companies, witnesses selected to testify -- among them members of the retail community, a consumer group, a small bank and a credit-card industry consultant -- presented opposing facts regarding the fees that banks charge merchants for accepting credit-card payments.
In fact, Ric Keller, a member of the Task Force, listed a number of inconsistencies that were expressed by retailers and members of the banking and credit industries.
For instance:
-- Retailers say they cannot view operating rules, while financial representatives say they disclose their rules online and retailers are free to view them;
-- Retailers claim they are not allowed to offer discounts for cash transactions, while financial representatives state that retailers can use cash discounts, post them and even advertise them in their stores;
-- Supermarkets retailers state they have no bargaining power, that it is a "take it or leave it" policy on credit cards, while financial representatives said retailers have many options for taking cards, and cited such retailers as Costco, Sam's Club and Neiman Marcus, all of which accept limited brands of credit cards.
-- Retailers claim that when interchange rates increase, it hurts consumers because retailers pass on the costs, while financial representatives said consumers benefit from the increased rewards and other benefits that come with being a cardholder; and
-- Retailers want competition and a free market for setting interchange fees, not price fixing, while financial representatives said retailers want to fix the price of interchange.
One witness testified that consumers can't be educated about what they have to pay as a result of interchange fees because retailers can't discuss the rules with them. The rules governing merchants who agree to accept a brand of credit card prevent merchants from informing consumers about the cost of payments, said Edward Mierzwinski, the consumer program director for U.S. PIRG, a consumer interest group.
In addition, interchange rates are "privately regulated by card company rules that will not be made available to this, or any other committee," noted Mallory Duncan, senior vice president and general counsel of the National Retail Federation (NRF) and chairman of the Merchants Payments Coalition (MPC).
Cash Discounts
Regarding the cash discounts, Duncan argued that it was not possible for all retailers to offer a lower price if customers pay with cash. "You'll see it at a gas station because they only have three products -- regular, mid-level and premium -- and so there, it's conceivable that you could offer a lower price for cash. But even when you have that option, they are trying to stop us from doing that," he said, citing an incident that occurred at a San Francisco gas station where the owner offered a cheaper price for cash purchases, but Visa went to the station and said it could not offer such a discount.
Take it or Leave it
Representatives from the banking and credit-card industries argued that retailers had options to decrease the impact of interchange fees, including not accepting credit cards or accepting a limited number of card brands that have lower interchange rates.
"Merchants can do lots of things," said John Buhrmaster, president of First National Bank of Scotia, N.Y. He cited Costco, Sam's Club and Neman Marcus as retailers that limit the brands of credit cards accepted. Also, merchants can offer, advertise and post signs in stores for cash discounts and can steer customers to debit card payments, which are cheaper, Buhrmaster told the House Judiciary Committee.
However, merchants at the hearing stated that was not an option.
"There is no negotiation with credit-card companies, it's a take it or leave it," said Steve Smith, chairman of the Food Marketing Institute and president and CEO of K-VA-T Food Stores in Virginia. "If we chose not to accept credit cards, we're turning our back on 60 percent of transactions. It's not inviting to tell customers 'no.' We don't mind taking credit cards. What we want is a fair fee to be charged to retailers."
Free Market
Smith recalled, "The initial volume of card payments was low and quite honestly, our industry thought the rate changes would fall as transaction volume increased. This would be consistent with basic economic theory and various other aspects of our business. However, the exact opposite has proved true," he said. The grocery industry now faces an fee upwards of 2 percent -- nearly double K-VA-T's profit margin, he noted.
He continued: "We're not lobbying to deny the credit-card companies from their reasonable profits, we only ask that we not be faced with costs imposed on us that were set collectively by card systems and their member banks in an environment that is deliberately designed to deprive America's merchants of any freedom of competitive action. … And the great shame of it, my friends, is that the consumer bears the cost and this fact has been effectively hidden from them."
Tim Muris, of Counsel O'Melveny & Meyers, argued that the credit-card industry is expensive to operate. "The simplicity of credit cards belies a complex technological infrastructure that supports these transactions, and costs billions of dollars [to operate.]"
He also stated that retailers are incorrectly labeling interchange as price fixing. "The end of interchange would lead to chaos, the merchants understand this. They don't want interchange to end, the just want to pay less. They argue against card setting interchange rates. That isn't an antitrust remedy. If so, the market, not the government, would set interchange."
Duncan, of the NRF and MPC, countered by noting that "The two cards [Visa and MasterCard] operate as a price-fixing cartel, a clear violation of antitrust rules."
To solve the problem of interchange fees, Mierzwinski suggested making the interchange policies more transparent. "The first step is sunlight, the best disinfectant," he said.
Yesterday's hearing was the first of several the committee plans to hold.
John Conyers Jr., chairman of the task force, concluded, "Solutions to this problem are few and far between. This is going to test the skills and competency of this Judiciary Committee a great deal."