This week, Visa took a step towards retailers by telling the House Judiciary Committee’s Antitrust Task Force that it is willing to sit down with retailers and negotiate interchange. In addition, both Visa and MasterCard announced that their complete operating rules would be publicly available soon.
In response to testimony by NACS Vice Chairman of Government Relations Tom Robinson that retailers can negotiate processing expenses with their local banks but that interchange rates were off the table, Joshua Floum, general counsel for Visa, Inc., volunteered to meet with Tom immediately after the hearing and begin negotiations on interchange rates. Similar offers in the past have been disingenuous, but the offer was made.
Of course, one must question the value of the offer since also Floum testified that he would be willing to negotiate lower interchange rates to the extent that the results would drive more volume to the Visa network. One must also question the validity of the offer, since it has taken years for Visa to decide that merchants should be allowed to see the credit card company’s operating rules without having to sign a non-disclosure agreement – an announcement that just happened to coincide with Thursday’s hearing.
MasterCard also testified that over the past four years, in response to concerns expressed by merchants regarding the secrecy of MasterCard’s rules, the company has been releasing portions of its rules as they relate to merchants. MasterCard’s Chief Payment System Integrity Office Joshua Peirez testified that MasterCard has now begun the process of making its complete set of rules available online.
How kind of them to let retailers know ahead of time the terms to which they are agreeing. Of course, it took several congressional hearings and promises from the credit card companies to make these rules available before they endeavored to actually do it.
Throughout the hearing, Robinson did a masterful job of presenting the issue as it directly relates to retailers. Speaking as a business owner, he was able to articulate the industry’s concerns with sincerity and conviction, a style which resonated with the Task Force. He acknowledged that plastic payment technology carries with it great benefits for consumers and retailers alike, but that the manner in which associated fees are established contradicts the basic principles of a free market economy. He explained that retailers were simply asking for the ability to negotiate on a level playing field regarding the credit card interchange fees they must pay – just like they are able to negotiate other expenses incurred by their business.
Overall, the hearing presented another fantastic opportunity to further educate members of the House Judiciary Committee regarding the importance of moving forward with H.R. 5546, the Credit Card Fair Fee Act. Of course, Visa and MasterCard continued to say the legislation is just government price fixing. They pointed to provisions that would appoint a panel of judges and empower them with fact-finding authority, such as subpoena and depositions.
The credit card companies didn’t acknowledge that this panel is only convened if the two sides in the negotiations (the credit card companies and the merchants) failed to come to an agreement. They further failed to acknowledge that this panel would be severely constrained in its actions and empowered only to select between the final offers proffered by either party. The fact-finding authority is designed to enable the panel to make an accurate determination of which final offer most closely reflects rates and terms that would have occurred in a fully functioning competitive market.
In defense of the existing interchange price fixing system,. Floum testified that Visa had not increased its interchange rates in 10 years, displaying a chart showing the leveling of the average blended interchange rate for its credit cards. However, in later questioning, he acknowledged that the credit cards with extensive rewards programs have incurred increases in their already comparatively higher interchange rates to cover the expansion of such programs and that their overall use in the marketplace has increased substantially as more consumers opt to receive additional card user benefits. Consequently, one might conclude that the average blended interchange rate for all cards is not truly representative of the actual interchange rate charged to retailers.
His testimony on this topic was also contradicted by a March 1, 2006, article in American Banker which reported that Visa would hold its interchange rates steady. The article noted that “Visa’s decision to hold its rates steady is a big shift. In years past they could rely on steady interchange increases.” In addition, the article noted that “According to the credit card industry newsletter The Nilson Report, interchange rates for Visa and MasterCard International have risen steadily every year since 1997.”
How is it possible that rates have remained steady for 10 years? Apparently, it is like those hidden pictures that were popular in the early 1990s…you have to really want to see it.
In another problem for the credit card associations, MasterCard touted its decision to cap interchange fees on gasoline transactions, effective April 1, 2007, at the $50 level. This means that any transaction above $50 at the pump would pay the same interchange as if the transaction was for exactly $50. Mr. Peirez expressed disappointment that “most petroleum retailers have not taken advantage of this opportunity to negotiate better rates for MasterCard acceptance based on the reduced default interchange rate” and that they did not use “it to reduce what they pay to accept payment cards on competing networks.”
An unofficial, quick survey of some NACS members immediately prior to the hearing demonstrated that most retailers did not know about this “cap” and have not seen evidence of its implementation. This is not surprising, especially considering that John Blum, vice president of operations of Chartway Federal Credit Union, noted during the hearing that he was surprised to hear that MasterCard had taken such an action since he knew nothing about it. If a financial institution which issues credit cards does not know about a change in the interchange policy of MasterCard, how can retailers be expected to know about this change and use the information to negotiate better processing rates with their local banks?
In political discourse it is not always convenient to confuse the rhetoric with the facts. Fortunately, enough representatives on the Task Force were in-tune with the issue to ask tough questions, of all witnesses, and draw out much of the truth underlying the issue. It is likely that another hearing will be convened to enable the Task Force to receive testimony from the large banking interests involved in the credit card system.
To a large extent, the interest and familiarity with this issue exhibited by the legislators on the Task Force has been strongly supported by the role of each NACS member who has written their legislators regarding credit card fees and the Credit Card Fair Fee Act. To date, more than 1,300 letters have been sent to Congress on this critical issue. It is absolutely essential that these letters keep coming. To send a letter, simply click here and follow the prompts.
Your action on this issue has increased overall support for the legislation. As of Thursday evening, the following representatives have cosponsored H.R. 5546:
1. Rep. John Conyers (D-MI) 03/06/08
2. Rep. Chris Cannon (R-UT) 03/06/08
3. Rep. Zoe Lofgren (D-CA) 03/06/08
4. Rep. Bill Shuster (R-PA) 03/06/08
5. Rep. Anthony Weiner (D-NY) 03/06/08
6. Rep. Bill Delahunt (D-MA) 03/06/08
7. Rep. Todd Platts (R-PA) 03/06/08
8. Rep. Peter Welch (D-VT) 03/06/08
9. Rep. John Sullivan (R-OK) 03/06/08
10. Rep. Joe Wilson (R-SC) 03/06/08
11. Rep. Louie Gohmert (R-TX) 03/06/08
12. Rep. Ralph Hall (R-TX) 03/06/08
13. Rep. John Boozman (R-AR) 03/06/08
14. Rep. John Peterson (R-PA) 03/06/08
15. Rep. Chris Carney (D-PA) 03/12/08
16. Rep. Keith Ellison (D-MN) 04/02/08
17. Rep. Eddie Bernice Johnson (D-TX) 04/03/08
18. Rep. Betty McCollum (D-MN) 04/08/08
19. Rep. John Yarmuth (D-KY) 04/09/08
20. Rep. Heath Shuler (D-NC) 04/10/08
21. Rep. Ed Whitfield (R-KY) 04/10/08
22. Rep. Phil English (R-PA) 04/15/08
23. Rep. Zach Wamp (R-TN) 04/17/08
24. Rep. Pat Tiberi (R-OH) 04/22/08
25. Rep. Jon Porter (R-NV) 04/22/08
26. Rep. Russ Carnahan (D-MO) 04/22/08
27. Rep. Jim Marshall (D-GA) 04/22/08
28. Rep. Tom Allen (D-ME) 04/29/08
29. Rep. Sheila Jackson Lee (D-TX) 04/29/08
30. Rep. Steve Kagen (D-WI) 04/30/08
31. Rep. Charles Gonzalez (D-TX) 05/13/08
32. Rep. Jerry McNerney (D-CA) 05/13/08
Have a great weekend.
John Eichberger
Vice President, Government Relations