Interchange Caps Not Wanted, C-Stores Chief Tells Congress

The battle over interchange, which has already spawned some 47 antitrust suits against the bank card networks and major banks, reached the U.S. Congress today as advocates for both retailers and banks traded sometimes barbed arguments before a panel holding a one-day hearing to look into the networks' pricing mechanism. Members of the Subcommittee on Commerce, Trade, and Consumer Protection of the House Committee on Energy and Commerce heard a merchant representative deny retailers are seeking price controls and accuse the card associations of engaging in price fixing and of keeping secret key rules affecting merchants' acceptance costs. On the other side of the divide, a speaker for the associations, pointing to potential damages of nearly $1 trillion (with trebling) by the time the plaintiffs' claims reach trial, charged that merchants “probably assume they can extort a settlement” from the bank networks. In fact, this remark from former Federal Trade Commission chairman Timothy J. Muris provoked the most comment from members of the panel, some of whom called it extreme. Muris, now with O'Melveny & Myers LLP, a Washington D.C. law firm, testified on behalf of the Electronic Payments Coalition, an organization recently formed by the payment networks. He told the panel that, instead of trying to end the price fixing arrangement they allege lies behind interchange, merchants are actually seeking price caps. “It's not that they don't want prices fixed, it's that they want them fixed [at a lesser rate],” he said. “Such caps will inevitably increase card prices to consumers.” But Henry Armour, president and chief executive of the National Association of Convenience Stores, countered that far from seeking price regulation, merchants want a stronger negotiating position with respect to the banks, which he said are able to virtually dictate terms because of their hammerlock on the general-purpose card market. “We're not talking about price controls or caps,” he told the panel, pointing out that Visa USA and MasterCard International refuse to disclose their operating rules and regulations, leaving retailers in the dark when it comes to practices that could affect the rates they pay for card acceptance. Armour's association, along with three other retail trade associations, sued Visa, MasterCard, and several major banks over interchange last September (Digital Transactions News, Sept. 26, 2005). He said U.S. merchants pay among the highest interchange rates in the world, despite high volumes of transactions, cost-efficient technology, and low fraud rates. Muris disputed this claim, arguing that rates in the U.S. are lower than in all but three other countries, which he did not name. Muris also said the merchants' demand for “transparency” with respect to network operating rules is a “smokescreen.” “They know what the interchange fee is,” he said. On the question of merchants' negotiating position, Muris took issue with the concept of a monolithic bank card interchange rate, arguing that merchants pay different rates depending on their size and ability to negotiate with acquirers. “It's simply wrong that individual retailers haven't negotiated [better rates],” said Muris. Questioned by members of the panel, Armour said his association has looked into the idea of forming a competing payments network as an alternative to litigation, but so far finds the idea impractical. “We've had those discussions for six years,” he said. “The economics of it are just cost-prohibitive to launch a competitive product. We continue to look at it.” The subcommittee, which has oversight responsibility for the FTC, is chaired by Rep. Cliff Stearns, R-Fla.