Bill Could Result in a Sharp Cut In CU Card Interchange Fees

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

Congressman John Conyers (D-Mich.), chairman of the House Judiciary Committee, introduced H.R. 5546, the Credit Card Fair Fee Act. The legislation would require the major card brands to negotiate with merchants to reach an interchange settlement. If an agreement cannot be reached, both sides would have to submit to binding arbitration by a panel of judges appointed by the Department of Justice and Federal Trade Commission.

"This legislation would use the nation's antitrust laws to rein in the greed of the credit card companies," said Mallory Duncan, senior vice president for the National Retail Federation. "With the rapidly increasing use of plastic, credit card companies and their banks are seeing a windfall that is costing U.S. consumers tens of billions of dollars each year. These are fees that most consumers don't even know they're paying because Visa [and] MasterCard have tried to keep them secret. The introduction of this legislation marks the beginning of the end of credit card company rip-offs."

"Rather than allowing these fees to continue to be set in secret and imposed on a take it or leave it basis," Duncan added, "this legislation would require negotiations and allow retailers to seek fair terms and conditions that will ultimately mean a better deal for consumers."

"Consumers are already angry at the way they've been treated by credit card companies, and this bill is an important step toward making credit card companies treat both merchants and their customers with respect."

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

"What we have here is a failure of the market," contended Duncan. "The credit card companies cannot argue for an uncompetitive system simply on the grounds that they need the money."

Recognizing the matter as an issue of income for financial institutions would leave it the responsibility of the House Financial Services Committee. So far, the bill has only been referred to the Judiciary Committee and has 13 co-sponsors, but legislative observers have suggested that the Financial Services Committee could be added. Card interchange provides a significant non-interest income stream for many financial institutions, including credit unions.

The retailers' rhetoric appears to mostly target the card brands, particularly Visa and MasterCard, but has not addressed card issuers even though they are leading the opposition to the bill.

An organization of banks, bank associations, CUSOs and credit union associations called the Electronic Payments Coalition has been formed to oppose the bill. The coalition includes NAFCU; Card Services for Credit Unions, the association of credit unions that process their card transactions with Fidelity National Information Services; and PSCU Financial Services, the payments CUSO whose members primarily process their card transactions with First Data Corp.

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

Ryan Donovan, CUNA vice president of legislative affairs, told reporters on March 10 that the association is looking "very seriously" at the bill but that congressional contacts told CUNA not to expect even an attempt to move the bill until April.

In addition to being a member of EPC, NAFCU has also begun working independently against it. "This is a bill which is of significant 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 opposition for months to the bill's approach and that NAFCU has already begun speaking to legislative contacts about it.

In a prepared statement, NAFCU President/CEO Fred Becker attacked the legislation. "Credit card interchange fees, like labor, advertising or the price of real estate, are a cost of doing business. Just like any other business expense, merchants build that cost into the final price of their goods and services. This bill will only decrease consumer credit availability and increase the cost of credit."

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

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

"The Electronic Payments Coalition strongly opposes the price control legislation that was introduced today in the U.S. House of Representatives by Rep. John Conyers (D-Mich.) and Rep. Chris Cannon (R-Utah)," the coalition said in a prepared statement. "This legislation would establish a government rate-setting board that would impose price controls on the electronic payments system--despite these groups' years of denials that price controls were their ultimate goal."

EPC pointed out that similar attempts in other countries to address card interchange had not benefited consumers--the basis upon which the interchange laws were advanced. Instead, the laws resulted in "dramatic reductions" in the rewards and benefits from their credit and debit cards, the coalition alleged.

"We understand that every business wants to find ways to cut overhead costs for valued services," EPC concluded. "But government intervention in a system that is clearly working well for all parties in the marketplace would be counterproductive and ultimately harmful for all involved."

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

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

Impact on Interchange

Since the bill mandates what is essentially a negotiated or conditional action (judges would not get involved unless negotiations failed), it is difficult to tell what the bill's impact might be.

But card analysts said that a reduction in interchange that the bill might mandate could cause significant changes in card management and rewards programs.

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

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

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

Irving also observed that the rewards programs also benefit the various merchants to the extent they help drive consumer behavior toward those choices. She also charged the merchants with a degree of duplicity in their approach to the issue. "From what I have seen, they are trying to cast card interchange as a fee like one of the direct to cardholder fees that some banks charge their cardholders, when interchange is nothing like that."

--dmorrison@cutimes.com