(January 19, 2009) Interchange, the most controversial part of credit and debit card pricing, is the subject of a background paper MasterCard Inc. posted on its Web site last week, just ahead of the inauguration on Tuesday of a new president and his administration. A MasterCard spokesperson tells Digital Transactions News the document highlights the often-overlooked benefits of the payment card system. But a merchant involved in a lawsuit challenging interchange derides the document as a defense of a pricing component facing increasing “legislative scrutiny.”

MasterCard’s paper, titled “Benefits of Open Payment Systems and the Role of Interchange” came out as president-elect Barack Obama prepares to take office. Many observers expect the new administration and the heavily Democratic new 111th Congress to embrace more regulation of the financial industry, particularly in the wake of 2008’s financial meltdown.

A MasterCard spokesperson, however, says the interchange paper is not the opening salvo in what could be an active year on the legal battlefields. “I think we realized for a while that in all the debate over interchange, the benefits of the system, the innovation that’s behind the transaction, has gotten lost in the discussion,” the spokesperson tells Digital Transactions News. “There are huge benefits, there’s so much people take for granted.”

The paper notes the higher purchase power payment cards give to consumers and how, on the credit card side, general-purpose cards have relieved most retailers of needing to run in-house card programs with their attendant costs and risks. In his opening remarks, MasterCard president and chief executive Robert W. Selander addresses interchange, the portion of a bank card sale set by the network, charged to the merchant acquirer, and paid to the card issuer. Acquirers typically pass the cost on to their merchant clients.

“Interchange plays a vital role in balancing the needs of consumers and merchants, allowing for all parties to receive the highest value and benefits at the lowest costs,” Selander said. “Indeed, the balance made possible by interchange fees drives down costs to consumers and enables merchants to obtain the benefits of card acceptance at costs far below those they would incur if they operated their own systems—all while achieving maximum card issuance, usage, and acceptance in a fiercely competitive marketplace.”

The 14-page electronic brochure goes on to explain how various payment card systems work and addresses the controversy around interchange. It denies that interchange is the “hidden tax” portrayed by opponents, and says interchange fees “ have become an issue because some merchants have decided to seek—through lawsuits and regulation—lower card-acceptance fees than they can obtain in the market.” MasterCard says interchange plays a “pivotal role” in card payments, but that consumers are “completely unaware of how interchange benefits them, they see no need to weigh into the public debate.”

But Mitch Goldstone, president and chief executive of ScanMyPhotos.com in Irvine, Calif., dismisses the paper as “no surprise.”

“Interchange fees are one of the few that are increasing; even oil prices are decreasing,” says Goldstone, a plaintiff in a case pending in U.S. District Court in Brooklyn, N.Y., where interchange opponents are seeking to consolidate multiple lawsuits into a class action against the card networks and some big banks. Goldstone, who also operates an anti-interchange blog called WayTooHigh.com, notes that “MasterCard and Visa and their fewer member banks are challenged not only by the economy, but by … significantly larger legislative scrutiny of the entire banking industry.”

Last year, Congress put interchange in its crosshairs with the proposed Credit Card Fair Fee Act, which would have put the government in the role of arbiter if merchants and the card networks couldn’t reach pricing agreements (Digital Transactions News, July 16, 2008). The bill didn’t pass, but it triggered a rush of lobbying by interchange defenders. No interchange bills have yet been introduced in the two-week-old 111th Congress.

MasterCard’s paper can be accessed at www.mastercard.com/us/company/en/docs/BENEFITS%20OF%20ELECTRONIC%20PAYMENTS%20-%20US%20EDITION.pdf