Entering the Lion's Den | NACS Online – Magazine – Past Issues – 2009 – November 2009
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Entering the Lion's Den

By John Eichberger

The battle over interchange nev­er slows, but it’s often fought on familiar turf. Rarely does an army launch a fight when the opponent has clear home-field advan­tage. However, sometimes that is exactly what is required to move toward victory.

On October 8, the retail community took the interchange battle to the home turf of the credit card companies — the House Financial Services Committee. Long considered the legislative strong­hold for the banking industry, this committee, along with the Senate Banking Committee, has jurisdiction over banks and credit card practices. Until now, swipe fees have been dis­cussed in the House Judiciary Commit­tee and from the perspective of antitrust law. But as predicted earlier, after many large banks helped push the U.S. economy to the point of financial meltdown, com­mittees with jurisdiction over banking practices have more actively looked at how the banks are treating retailers (as unfairly as they treat their credit card holders). The swipe fee hearing was integrated as part of a series of Financial Services Committee hearings and legislative activity designed to overhaul the regula­tion of the U.S. financial system. In the middle of that work, Chairman Barney Frank (D-MA) decided the committee ought to learn more about swipe fees. As a result, the committee took a look at bi­partisan legislation sponsored by Rep­resentatives Peter Welch (D-VT) and Bill Shuster (R-PA) — the Credit Card Interchange Fees Act of 2009, H.R. 2382. (To view the hearing visit http://tinyurl. com/yh27544.)

As champions of their own cause, Welch and Shuster both testified that the current set of rules forced upon retailers is broken. Shuster made particular men­tion of NACS member organization Sheetz, which is headquartered in his district. He noted that swipe fees are the second largest operating cost for Sheetz, more than their annual profits and more than rent on their stores. That, he argued, does not make sense.

Joining Welch and Shuster in support of the bill were:

  • Kathy Miller, co-owner of the Elmore General Store in Elmore, Vermont;
  • Mallory Duncan, National Retail Fed­eration general counsel and president of the Merchants Payments Coalition; and
  • Ed Mierzwinski, senior fellow, Con­sumer Program, U.S. Public Interest Re­search Group.

Mierzwinski also announced that Americans for Financial Reform, a coali­tion representing 200 consumer, labor and civil rights groups, had also taken a position in favor of swipe fee reform and H.R. 2382.

On the other side of the argument: a University of Chicago law professor, an executive with Liberty Bank and one with a local government credit union.

Our Side
Members of the committee expressed a variety of perspectives during their opening statements and questions. A few were notable:

Chairman Frank argued that given the banks’ past efforts to constrain mer­chant choices in the market (such as through prohibitions on surcharging), he had a hard time listening to their protes­tations that Congress should stay out of this issue to allow a pure, free market to work. Once having successfully con­strained the market, the free market ar­guments from the banks rang hollow. He compared the banks to the Hollywood starlet called out by the head of Warner Brothers: "I knew her before she was a virgin." Some claims to "purity," once surrendered, were difficult to recover.

Representative Maxine Waters (D­-CA) took pains to mention her support of credit unions and minority-owned small banks, but said that the current swipe fee system simply had too many problems to continue in its current form. She spoke directly to the bank and credit union wit­nesses and told them that she would lis­ten to their concerns about how to re­form the system but that they needed to know that the system must change and simply saying "no" was not acceptable.

Representative Mel Watt (D-NC) said that the approach advanced in the Judiciary Committee (the Credit Card Fair Fee Act) last year was not the way this issue ought to be dealt with. He was glad the Financial Services Committee was looking into swipe fees. He also inti­mated that something had to be done to fix the system —though he admitted that he was not yet sure precisely what that should be. He then asked witnesses on the panel if anyone thought that the committee should do nothing about swipe fees. No one — not even the bank witnesses — was willing to agree.  

Representative Luis Gutierrez (D-IL) expressed particular concern for Kathy Miller and small businesses like hers. Those businesses need protection, he said.

The Other Side
Not surprisingly, several members of the committee expressed opposition or skepticism of reform:

Representative Jeb Hensarling (R-­TX) said that perhaps merchants should start their own competing card. He asked about legal impediments to doing that. Duncan cited impediments, including the monopoly power of

Visa and MasterCard, but Hensarling ap­peared unmoved.

Representatives Brad Sherman (D-CA) and Gregory Meeks (D-NY) also clearly repeated banking industry talking points and asked, "Wouldn’t mer­chants just pocket the savings if swipe fees were reduced?" While Duncan and Mierzwinski both testified about the competitiveness of the retail market and the fact that there was no reason to ex­pect a market failure in that area that would lead to increased profits, Sher­man and Meeks did not seem open to these reasoned responses.

The hearing helped demarcate the lines of agreement within the Financial Services Committee and exposed those who believe retailers and consumers should be treated fairly by the banks and those who would prefer to support the abuse of power exercised by monopoly interests. While this was the first official entry into the opponent’s side of the court, it is not the last — by far.

Meanwhile, Across the Capitol...
The House Financial Services Commit­tee is not the only friend of the banks who might be taking a more critical look at the behavior of the financial institutions. At the end of September, Senate Banking Committee Chairman Chris Dodd (D­CT) announced that he will propose leg­islation to "substantially modify" mer­chant credit card fees.

His statement backs up comments made earlier this year about legislation to address swipe fees. We look forward to working with both Chairmen Dodd and Frank in support of legislation that will reform the system.