US interchange battle heats up

US interchange battle heats up

As the interchange debate heats up in the US, banks and credit card networks have seized upon a report by the Government Accountability Office (GAO) that claims a reduction in interchange fees would not necessarily benefit customers.

Publication of the report comes as retailers and card networks square off in front of a House Judiciary Committee antitrust task force which is investigating proposals to introduce the Credit Card Fair Fee Act and give merchants more power to negotiate interchange fees.

The GOA report found that federal agencies have reported higher levels of customer satisfaction and improved operational efficiency since accepting credit and debit cards. Some agencies have also attempted to negotiate lower interchange fees, with "mixed success".

The GOA also casts doubts on claims that government moves to cut interchange fees in other countries has benefited consumers.

In Australia, regulators intervened in 2003 to reduce interchange fees but the GOA says that although merchants have benefited, "no conclusive evidence exists that lower interchange fees led merchants to reduce retail prices for goods". In the meantime banks that issue cards have reduced rewards and increased consumer fees.

Both MasterCard and the Electronic Payments Coalition claim the report backs up the argument against any intervention in the market.

"By providing examples of other countries where such price controls have been attempted, the report reveals flaws in such an approach and illustrates the adverse effects on consumers that resulted in such attempts," says the EPC in a statement.

The coalition says it hopes the report will further convince Congress that any intervention "would be harmful to all participants in the credit and debit market".

MasterCard has also urged Congress to review the report before taking action to regulate interchange fees.

Earlier this week Joshua Peirez, chief payment system integrity officer at MasterCard Worldwide, told the committee that merchants don't need price control legislation or an antitrust exemption to lower costs for payment card acceptance as they already have "real opportunities to negotiate fees"

"Even though this is a basic commercial dispute, merchant lobbyists appear to be casting aside existing opportunities to negotiate in favor of congressional intervention in the form of price control legislation," said Peirez.

Peirez said MasterCard responded to merchant concerns by publishing its rules and all of its default US interchange rates online in 2004. Later, at the request of merchants, MasterCard posted the chargeback rules. Now, in response to merchant requests, MasterCard will make all of its operating rules available to merchants.

"The publication of MasterCard's rules and default interchange rates was designed to enhance the merchants ability to negotiate prices and the terms of MasterCard acceptance," said Peirez. "It's not clear why they have not used this information to their advantage."

Peirez said merchants are given a significant amount of valuable information for negotiating with the hundreds of acquiring banks that compete for merchant business to get the best rates and terms they can.

However in a statement, Mallory Duncan, senior vice president and general counsel at The National Retail Federation (NRF), said there is "no transparency and no negotiation under the current system".

"Legislation would bring about true competition among the banks that issue credit cards, giving retailers the opportunity to negotiate terms on behalf of themselves and their customers that reflect the actual cost of the services provided,” said Duncan.

In the US the percentage of interchange fees is set by the credit card companies - generally Visa or MasterCard - and averages 1.75% of the total purchase price. In 2006 Visa and MasterCard banks collected more than $36 billion in interchange fees last year, up 17% from 2005 and 117% since 2001. In 2007, the fees amounted to $42 billion.

In Europe, the European Commission has taken against action MasterCard over interchange fees charged on cross-border card transactions. The Commission is also investigating the fees charged on cross-border transactions by Visa Europe following the expiry of an antitrust agreement between the card company and the EU's Competition Commission.

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