(January 28, 2010) On the Back Burner in Congress, Interchange Heats up in California

Proposed regulation of interchange is stalled in Congress, but California lawmakers are investigating the controversial revenue generator for credit and debit card issuers that merchants ultimately pay. It’s not clear yet, however, whether the informational hearing held this week by the California Assembly’s Banking and Finance Committee ultimately will result in a law.

At the very least, the hearing shows that states are trying to play a role in shaping the interchange debate. And as the biggest state, California can’t be ignored. “The fact that they are looking into this is a big deal in and of itself,” says Liz Garner, director of government relations for the Arlington, Va.-based Food Marketing Institute, a trade group for grocery stores. Garner was one of a dozen witnesses on the hearing agenda.

The committee’s chairman, Assembly member Pedro Nava, D-Santa Barbara, said in a statement after the Jan. 25 hearing that “Interchange fees inflate the cost of nearly everything consumers buy, even when they pay cash. American families pay an average of $427 a year on interchange fees. My goal is to walk away from the hearing today with a better understanding as to why credit card companies and banks think this is fair and, in addition, find a way to pass cost savings on to California consumers.” A spokesperson for Nava, who is running for California attorney general, did not respond to a Digital Transactions News query about whether Nava planned to file a bill.

Witnesses included both defenders and opponents of the system under which the bank card networks set the transaction fee that merchant acquirers pay to card issuers, with acquirers usually passing the full cost on to their merchant clients. Some of them, such as Mallory Duncan, senior vice president and general counsel of the National Retail Federation, have testified on Capitol Hill about the pending federal bills. Duncan said interchange deprives the state of California of sales-tax revenue because the card networks calculate interchange based on the final sale price, including sales tax. “Members of the committee, the sales tax is not our money,” he said. “It’s not the credit card companies’ money. It’s the people’s money. Californians are hurting, so why should businesses have to pay credit card companies a fee to collect money for the state?

Consultant and former Visa International executive Eric Grover, who was not a witness, says the California Legislature has better things to do than tinker with interchange. “This state is barreling toward a fiscal and economic abyss,” Grover tells Digital Transactions News, noting the state’s huge budget deficit. (The Los Angeles Times this week said the deficit amounted to $20 billion.) Grover, principal of Menlo Park, Calif.-based Intrepid Ventures, says any interchange regulation California would try to impose might be challenged by out-of-state companies as a burden on interstate commerce, and could drive California-based acquirers out of the state.

A number of other states have considered interchange bills in recent years, but few if any have passed. A few proposals have sought to regulate pricing, but most have involved non-monetary issues such as disclosures.

Meanwhile, there has been no action recently on the two bills in the U.S. House of Representatives and one in the Senate that would regulate interchange or nullify some of the longstanding network policies regarding card acceptance (Digital Transactions News, Oct. 8, 2009). Political observers say Congress is preoccupied with bigger issuers. A spokesperson for the NRF says by e-mail that it’s possible a hearing could be held in the spring, but nothing is official yet. “Just about everything in Congress has been put on hold by health care,” he says. “[It’s] really hard to get anybody to focus on anything else until that is resolved.”