Interchange Report Could Counter Legislation

MARK HAMSTRA

WASHINGTON — The recent report by the General Accounting Office here on the impact of payment-card interchange fees could hinder the retail industry's effort to curb such fees, some observers said.

The fees, which are assessed by banks on every transaction involving a debit card or credit card, are an anathema to retailers, who have been battling for years to get Congress to regulate them. The banks and card issuers, however, say the fees are necessary to support the cost of processing transactions and that the cards drive increased sales at retail.

The GAO report found that consumers could benefit from lower interchange fees because some product prices could be reduced, but it also noted that legislation regulating such fees would be difficult to enact.

That led some observers to speculate that the report could make legislators reluctant to take action on the issue, despite the introduction of a handful of bills in the past year.

Jason Kupferberg, an analyst with UBS Investment Research, New York, said the report overall was favorable for card issuers.

“The lack of any significant ammunition in the report to support interchange regulation should be positive for [Visa and MasterCard], we believe,” he said.

The options for reducing interchange fees, such as price caps, increased disclosure and allowing direct negotiation between merchants and issuers, all have “potential drawbacks,” he pointed out.

Another report from Goldman Sachs said legislation would now be “less likely” because of the GAO study, “given that consumer benefits are not overwhelming and implementation would be difficult.”

The GAO report supported the contention by retailers that issuers have been increasing their interchange fees, but did not go so far as to say this was occurring through monopolistic activity on the part of the card issuers.

“Concerns remain over whether the level of these rates reflects market power — the ability of some card networks to raise prices without suffering competitive effects — or whether these fees reflect the costs that issuers incur to maintain credit card programs.”

The report also noted that if fees were reduced, although prices for goods and services might be lowered, consumers could end up facing higher fees themselves for using their cards.

Food Marketing Institute, Arlington, Va., said the report confirms FMI's claims that credit card companies “cleverly disguise” their interchange-fee increases “by charging myriad rates for different industries and transactions.”

Visa now has 60 rate categories and MasterCard has 243 rate categories, the report found, up from only four for each company in 1991, FMI pointed out.

“The GAO report recognizes that big banks benefit the most from rising interchange fees, while neighborhood supermarkets and other Main Street businesses struggle with swipe fee increases, forcing them to pass along the costs to consumers,” FMI said in a prepared statement. “We hope the findings of the GAO report will help Congress better understand the need to act and provide relief to businesses and consumers.”

Speaking on behalf of the Merchants Payments Coalition, a network representing 2.7 million U.S. businesses, Lyle Beckwith, senior vice president of the National Association of Convenience Stores, said the report “confirmed key problems that we have raised about credit card swipe fees.”

“They found that the 10 largest banks have a stranglehold on this market, have used it to raise their fees, which all consumers pay, and that small businesses and low-income, cash-paying consumers get the worst deal from this arrangement,” he said in a statement.

Meanwhile, the Electronic Payments Coalition, representing card issuers, released a statement supporting aspects of the report that emphasized potential negative impacts on consumers of legislative action to reduce fees.

“The GAO's report leads to a clear conclusion: Current interchange legislation places the needs of giant retailers over the needs of consumers,” the EPC said in a prepared statement.

Legislation to curb interchange fees includes the Senate and House versions of the Credit Card Fair Fee Act and the Credit Card Interchange Fees Act of 2009.