WASHINGTON -- The long running dispute between retailers on theone side and the card brands with card issuers on the other hasfinally hit the legislative process.

Congressman John Conyers (D-Mich.), chairman of the HouseJudiciary Committee, introduced H.R. 5546, the Credit Card Fair FeeAct. The legislation would require the major card brands tonegotiate with merchants to reach an interchange settlement. If anagreement cannot be reached, both sides would have to submit tobinding arbitration by a panel of judges appointed by theDepartment of Justice and Federal Trade Commission.

"This legislation would use the nation's antitrust laws to reinin the greed of the credit card companies," said Mallory Duncan,senior vice president for the National Retail Federation. "With therapidly increasing use of plastic, credit card companies and theirbanks are seeing a windfall that is costing U.S. consumers tens ofbillions of dollars each year. These are fees that most consumersdon't even know they're paying because Visa [and] MasterCard havetried to keep them secret. The introduction of this legislationmarks the beginning of the end of credit card companyrip-offs."

"Rather than allowing these fees to continue to be set in secretand imposed on a take it or leave it basis," Duncan added, "thislegislation would require negotiations and allow retailers to seekfair terms and conditions that will ultimately mean a better dealfor consumers."

"Consumers are already angry at the way they've been treated bycredit card companies, and this bill is an important step towardmaking credit card companies treat both merchants and theircustomers with respect."

In an interview about the new measure, Duncan rejected thenotion that there might be a conflict over committee jurisdictionsince the question of card interchange income directly affected thebottom lines of card issuing financial institutions.

"What we have here is a failure of the market," contendedDuncan. "The credit card companies cannot argue for anuncompetitive system simply on the grounds that they need themoney."

Recognizing the matter as an issue of income for financialinstitutions would leave it the responsibility of the HouseFinancial Services Committee. So far, the bill has only beenreferred to the Judiciary Committee and has 13 co-sponsors, butlegislative observers have suggested that the Financial ServicesCommittee could be added. Card interchange provides a significantnon-interest income stream for many financial institutions,including credit unions.

The retailers' rhetoric appears to mostly target the cardbrands, particularly Visa and MasterCard, but has not addressedcard issuers even though they are leading the opposition to thebill.

An organization of banks, bank associations, CUSOs and creditunion associations called the Electronic Payments Coalition hasbeen formed to oppose the bill. The coalition includes NAFCU; CardServices for Credit Unions, the association of credit unions thatprocess their card transactions with Fidelity National InformationServices; and PSCU Financial Services, the payments CUSO whosemembers primarily process their card transactions with First DataCorp.

CUNA has not yet joined the EPC or taken a position on the billbut has referred the matter to its committees and is deciding whatposition to take, according to association executives.

Ryan Donovan, CUNA vice president of legislative affairs, toldreporters on March 10 that the association is looking "veryseriously" at the bill but that congressional contacts told CUNAnot to expect even an attempt to move the bill until April.

In addition to being a member of EPC, NAFCU has also begunworking independently against it. "This is a bill which is ofsignificant concern to our members, and we vigorously oppose it,"said Brad Thaler, NAFCU's director of legislative affairs.

Thaler said the association's members have expressed oppositionfor months to the bill's approach and that NAFCU has already begunspeaking to legislative contacts about it.

In a prepared statement, NAFCU President/CEO Fred Beckerattacked the legislation. "Credit card interchange fees, likelabor, advertising or the price of real estate, are a cost of doingbusiness. Just like any other business expense, merchants buildthat cost into the final price of their goods and services. Thisbill will only decrease consumer credit availability and increasethe cost of credit."

Becker maintained the current electronic payments systembenefits consumers, credit unions and merchants. Consumers cancarry a card that is honored worldwide; credit unions can offer avaluable service to their members and compete with the largestbanks in the world; and merchants get prompt, guaranteed payment,and many other benefits.

EPC has asserted that H.R. 5546 would mandate price controls oninterchange and deprive consumers of some of the things they likemost about credit card programs.

"The Electronic Payments Coalition strongly opposes the pricecontrol legislation that was introduced today in the U.S. House ofRepresentatives by Rep. John Conyers (D-Mich.) and Rep. ChrisCannon (R-Utah)," the coalition said in a prepared statement. "Thislegislation would establish a government rate-setting board thatwould impose price controls on the electronic paymentssystem--despite these groups' years of denials that price controlswere their ultimate goal."

EPC pointed out that similar attempts in other countries toaddress card interchange had not benefited consumers--the basisupon which the interchange laws were advanced. Instead, the lawsresulted in "dramatic reductions" in the rewards and benefits fromtheir credit and debit cards, the coalition alleged.

"We understand that every business wants to find ways to cutoverhead costs for valued services," EPC concluded. "But governmentintervention in a system that is clearly working well for allparties in the marketplace would be counterproductive andultimately harmful for all involved."

EPC Executive Director Peter Madigan said the introduction ofthe bill should be a call to action to credit unions to startgetting involved on a personal level with their legislators.

"As long as there was not a bill on the table a lot of theissues were very esoteric and hard to get your hands around, butnow that there is a bill on the table credit unions can make theseissues a lot more concrete."

Impact on Interchange

Since the bill mandates what is essentially a negotiated orconditional action (judges would not get involved unlessnegotiations failed), it is difficult to tell what the bill'simpact might be.

But card analysts said that a reduction in interchange that thebill might mandate could cause significant changes in cardmanagement and rewards programs.

Ondine Irving, founder of Card Analysis Solutions, said that asignificant drop in card interchange would usher in sharp changesin card portfolio management.

"Ideally, interchange represents 15% of a CUs card portfolioincome," Irving explained. "With 70% of card income coming fromfinance charges and 15% coming from fees, a sharp drop in cardinterchange would mean a credit union would have to start puttingmore emphasis on acquiring and holding balances rather than ondriving usage."

Indeed, since rewards programs exist primarily to drive cardusage and to help one card issuer make sure its cards get used overothers, rewards programs may be one of the earliest casualties ofan interchange drop, analysts pointed out.

Irving also observed that the rewards programs also benefit thevarious merchants to the extent they help drive consumer behaviortoward those choices. She also charged the merchants with a degreeof duplicity in their approach to the issue. "From what I haveseen, they are trying to cast card interchange as a fee like one ofthe direct to cardholder fees that some banks charge theircardholders, when interchange is nothing like that."

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