SANTA FE, N.M. – Credit unions probably shouldn't start worryingyet, but another battle over credit and debit card interchangewhich has the potential to further erode credit card profitabilityhas apparently begun to brew. The Federal Reserve Bank of KansasCity sponsored a conference over May 4-6 in Santa Fe, New Mexicowhich looked specifically at what the role of public authoritiesshould play, if any, in setting interchange fees. Theinvitation-only conference included executives from all portions ofthe card payments industry. Interchange is the money retailers andother card acceptors pay to credit and debit card issuers to beable to accept the cards. Traditionally the funds have gone tocover things like card losses through fraud and the costs ofnetworking to enable the electronic transactions to go forward.After the settlement of a landmark lawsuit brought by retailersagainst Visa and MasterCard over debit card interchange two yearsago, the two brands generally negotiate interchange rates withtheir largest users – retailers in big box stores like Wal-Mart,for example – and then promulgate a schedule of interchange ratesfor the rest of the retail industry which is based on the number oftransactions the retailer makes and the kind of transaction it is.Transactions over the Internet, for example, or the phone,generally carry the highest interchange while transactions atgrocery stores and gas stations generally carry among the lowestinterchange rates. But retailers from the Internet to the groceryindustry have begun to complain that interchange rates are toohigh, averaging almost $2.00 per every $100.00 spent on cards, andtheir complaints have drawn the attention of federal regulators whoconvened the conference in order to examine what, if anything, theyshould do. And, unlike two years ago, the complaints are notlimited to merely debit cards but include, and even emphasize,credit card transactions and therefore have much greater chance ofhurting credit unions' credit card income if interchange rates areregulated downward. Partially both in response to the hearing andpartially to further their goals, the retailers have formed anorganization, the Merchants Payment Coalition, to lobby the federalgovernment with their case that their costs of accepting creditcards is simply too high and that the Federal Reserve should stepin to regulate it, though the retailers will not say what form suchregulation might take. “Right now we are just hanging back andwaiting to see what the Fed might do,” said Craig Shearman, vicepresident for public relations with the National Retail Federation.“But we are very serious about this and determined to see itthrough,” he added. Shearman asserted that the retailersfundamentally believe they should not be charged any interchange atall, or at most only a small amount, because the credit cardissuers are the ones that really benefit from every transaction.“When you consider the finance change rates and the fees theycharge consumers, they have made credit cards extremely profitableand with card fraud losses down and volume growing, we don'tbelieve they should charge us anything,” he said. Shearman alsopointed out that in other countries card issuers pay retailersinterchange for taking their cards. Officials from other MerchantPayment Coalition members, which includes trade associationsrepresenting retailers, restaurants, supermarkets, drug stores,convenience stores, gas stations, online merchants and otherbusinesses that accept credit and debit cards, echoed Shearman'scomplaints. “The fees that the credit card companies charge defylogic and they are using them to increase profits far more than toprovide any meaningful benefits to retailers,” coalition SecretaryTeri Richman, senior vice president for public affairs at theNational Association of Convenience Stores, said. “Credit cardcompany rules effectively prohibit retailers from providingdiscounts for cash or checks in all but a handful of situations. Asa result, consumers pay more even when they don't use their cards.It's time for this constant picking of consumers' pockets to cometo an end.” Shearman and other representatives from the Coalitiontrade associations charged that, with fraud costs and otherexpenses down, both Visa and MasterCard and big card issuers wereusing their interchange funds not to cover losses but instead toenhance their card products with rewards programs and other perksin order to better compete in the competitive card market. “Let mebe clear here,” Shearman said. “Competition is great and I fullysupport firms putting strong card programs into the marketplace,but making those programs stronger should come out of their profitmargin, not ours.” But MasterCard and Visa, primarily MasterCard,have answered back strongly, asserting that both merchants andconsumers have benefited from having greater access to credit anddebit cards and the interchange rate is a small cost given thebenefits both types of cards bring. In comments prepared for akeynote speech at the Santa Fe conference, Noah Hanff, generalcounsel for MasterCard, charged that the agenda of high-pricedlawyers played more of a role in bringing the issue to the FederalReserve than any legitimate complaint from the retail community.“There is no evidence otherwise, and there is no legitimate basisto call for regulation of interchange fees,” Hanff's comments read.“There is one, and only one reason class action lawyers areincreasingly trying to align themselves with regulators and onlyone reason they are out knocking on doors, making phone callssearching for retailers to bring an interchange lawsuit. “Because,ladies and gentlemen, it's not really about high interchange fees,it's really about high attorney's fees. Yesterday, we all heardfrom one class action lawyer who is articulate and well spoken. Butmake no mistake about it, he and his fellow class action lawyersappeal for clients so that they can extract enormous fees forthemselves and their colleagues. His speech vividly demonstratesthat at bottom it is not about economic theories. It is not aboutmarket realities. It is about pure and simple – money-lust,” hisspeech said. Hanff strongly defended interchange on the groundsthat consumers and merchants get a great deal with MasterCard; thatinterchange is essential to four-party systems and cannot beanalyzed as a fragment in isolation from the whole; thatinterchange is highly beneficial, efficient, and pro-competitive;and, no one has found interchange to be illegal. Hanff also notedthat none of interchange's critics were attacking AmericanExpress's interchange, even though it is notably higher than Visaor MasterCard's and thus the attack translated into an assault onone form of payment system and not on another. No one, as of now,appears to know where all this might be going. Shearman and theretailers clearly hope for some sort of regulatory proposal fromthe Federal Reserve this year, but observers from the issuer's sideof the controversy downplay that expectation. “So far, the Fed hasindicated it is neutral on interchange matters,” Shearman said,“but the number of high-level officials attending the recentinterchange conference gives us reason to hope that the Fed plansto do something substantive on the question.” But Moshe Orenbuch, astock analyst for Credit Suisse First Boston, cast doubt on whetheranything would happen this year or next. “Everyone can hope, ofcourse, but I am not sure their [the retailers] hope is wellplaced,” Orenbuch said. “None of the officials I spoke with at thatmeeting appeared to want to regulate interchange rates,” heconcluded. -

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