FMI Testifies in House Hearing on Interchange Fees

MARK HAMSTRA

WASHINGTON — Food Marketing Institute was encouraged after a Congressional hearing this month on the antitrust implications of credit card interchange fees.

In the hearing before the Antitrust Task Force of the House Judiciary Committee, Steven C. Smith, chairman of FMI, testified that the interchange fees charged on each transaction by Visa and MasterCard do not reflect normal competitive pressures, because the credit card networks set them collectively.

Tim Hammonds, president and chief executive officer of Arlington, Va.-based FMI, said he was encouraged by the fact that the chairman of the committee, Rep. John Conyers, D-Mich., indicated that additional hearings may be scheduled on the topic.

“The chairman, I thought, sent a very clear message when he said this committee has heard some very interesting, sometimes conflicting testimony,” Hammonds told SN. “Congress didn't view the credit card companies as having answered the questions — they are saying that there are important issues to look at here.”

He said he thought there were “gaping holes” in the testimony given on behalf of the credit card companies, which were represented by an independent banker who said interchange fees help small banks remain competitive with national banking concerns, and by attorney Timothy J. Muris of O'Melveny & Myers.

“The credit card companies put their contempt for consumers on display for everyone to see,” said Hammonds. “The companies kept saying that the interchange fees should be regarded as just another cost of doing business. The translation of that is, even if you think these fees are outrageous, just pass them along to consumers and we'll all be happy.”

He noted that Muris likened the invention of the credit card to other modern technologies, such as personal computers and cell phones.

“The problem is, both cell phones and personal computers have used technology to drive down costs dramatically over time,” Hammonds said. “The price for both of these has fallen every year, while credit card companies have used the technology to drive down costs, but have raised the price every year.”

In his testimony, Smith, who is also CEO of Abingdon, Va.-based K-VA-T Food Stores, said the price-setting done by Visa and MasterCard for interchange fees “looks to me like price fixing under the antitrust laws.”

“We see credit cards from every state in the country, and I have yet to find even one bank that chose to offer an interchange rate lower than those collectively set and agreed upon by Visa or MasterCard,” he said in his testimony. “We are not lobbying to deny credit card companies their reasonable profit. We only ask that we not be faced with costs imposed on us that have been set collectively by card systems and their member banks, in an environment that is deliberately and collectively designed to deprive America's merchants of any freedom of competitive action. Given Visa and MasterCard's market share, we simply don't have the ability to say ‘no’ to the card systems' all-or-nothing proposition.”

FMI was joined in testifying by the U.S. Public Interest Research Group, a Washington-based consumer advocacy organization that sides with retailers on the issue of interchange fees.

“We agree [with retailers] that the bank-payment networks, Visa and MC, essentially function as a duopoly that is in violation of the antitrust and competition laws,” Ed Mierzwinski, consumer program director, USPIRG, told SN. “That duopoly allows them to impose very high prices on merchants and to essentially use their market power to force them to accept their services. The result of Visa and MasterCard's unfair practices is that all consumers — whether they pay with cash, a check, or a debit or credit card — pay more at the store and more at the pump.”

Interchange fees are also the subject of several lawsuits filed by retailers, and have been examined in two previous Congressional hearings. Given the newly Democratically controlled Congress, however, retail associations are hopeful that they might gain some traction this year in at least presenting their case before lawmakers.

In testimony on behalf of the credit card companies, Muris argued that the setting of interchange fees does not violate antitrust rules, and that consumers benefit from the way the fees are currently structured.

“The end of the interchange would lead to chaos, a decrease in available credit, a decline in the number of outlets that accept payment cards and less innovation,” he said.

In a prepared statement, Rosetta Jones, vice president of Visa USA, described the objection to the current system of interchange fees as an effort by retailers to simply reduce their own costs.

“The interchange debate is not about antitrust issues; it is about business,” she said. “Lobbyists representing some national retailers and trade associations are asking Congress to lower retailers' costs of doing business by imposing price controls and by granting retailers the ability to impose consumer checkout fees on their customers.”

She noted that government action against interchange fees in Australia has resulted in “increased costs and fewer choices for cardholders.”

Sharon Gasmin, vice president, communications, MasterCard, told SN that past litigation has found the interchange fee system to be “lawful and efficient.”

“MasterCard management independently establishes our default interchange rates, and neither our board of directors nor our customers set or approve our rates.”