Interchange Hearing Pits Small Merchant Against Small Credit Union

The opponents and defenders of bank card interchange had their say on Thursday before the U.S. House of Representatives' Judiciary Committee. What's next for the controversial Credit Card Fair Fee Act of 2008, however, is uncertain. The bipartisan bill introduced by panel chairman John Conyers Jr., D-Mich., and Rep. Christopher Cannon, R-Utah, would establish a judicial panel to impose card-acceptance rates if merchants and the bank card networks couldn't agree. Card-industry lobbyists predict the bill won't pass, and Congress's plate is full with other matters as it heads toward summer recess in an election year. The next formal step for H.R. 5546 is a Judiciary Committee vote. “I'm not sure when that will be,” a committee spokesperson tells Digital Transactions News. What is certain is how divided card issuers and networks on one side and merchants on the other are about interchange. Six witnesses submitted written testimony for today's hearing?two from merchant groups, a consumer advocate from the U.S. Public Interest Research Group, one each from Visa Inc. and MasterCard Inc. and one from a Virginia credit union on behalf of the National Association of Federal Credit Unions. All played their expected roles, with the retail and consumer representatives strongly endorsing H.R. 5546 and the card networks and the executive from Chartway Federal Credit Union heatedly opposing it. Some of the more interesting comments came from the head of a family-run gas station and convenience store chain as well as from Chartway, a modest card issuer. Both gave glimpses of how interchange affects their businesses. “Interchange fees are so significant that at six of my locations card fees are my No. 1 operating expense,” said Tim Robinson, president of Robinson Oil Corp., a 34-store chain based in San Jose, Calif. “Just at my stores, the fees went from $3.5 million in 2006 to more than $4 million in 2007 and my sales were flat or slightly down,” said Robinson, who spoke on behalf of the National Association of Convenience Stores. Robinson said convenience stores paid $7.6 billion in 2007 in interchange, more than double the industry's pre-tax profits of $3.4 billion. “It is clear that the price for the cashless society is way too high if you let the credit card industry set the rate,” he said. The National Retail Federation estimates Visa and MasterCard members this year will receive $48 billion in interchange?the amount of a bank card sale set by the networks and paid by the merchant acquirer to the issuer of the card used in a given transaction. Acquirers usually pass on the full expense to their merchant clients. Based on Visa and MasterCard's reported U.S. credit and debit card purchase volumes, Digital Transactions News estimates interchange totaled $42 billion last year, up nearly 11% from $37.9 billion in 2006. The revenue figures are based on an estimated blended credit card interchange rate of 2% in both years and a 1.5% blended rate for debit transactions. Yet John Blum, vice president of operations at Virginia Beach-based Chartway FCU, which has 160,000 members and $1.2 billion in assets, said that as a card issuer, the current system lets a smaller institution such as Chartway issue cards with as much utility as those issued by giant banks such as Citigroup Inc. or Wells Fargo & Co. Chartway's 43,000 credit card holders and 85,000 debit card holders made 14 million transactions last year, generating an average of 24 cents per transaction in interchange for the credit union. “This interchange fee income is vital in allowing Chartway to offer credit and debit card services to our members,” Blum said, noting that the 24 cents “is not pure profit.” The revenue goes to operations and partly to control fraud, which costs Chartway about $425,000 a year in direct losses and insurance. Blum also said 34% of Chartway's active credit card holders pay in full each month, which means they in effect get free short-term loans. Limiting interchange fees would simply give big banks, which have better economies of scale and ability to absorb losses, an advantage over credit unions and other small financial institutions, according to Blum. At Chartway, “we will find it more difficult than larger institutions to offset the losses from a cap on interchange fees,” he said. The Conyers-Cannon bill would give limited anti-trust protection to acceptance-cost agreements between the bank card networks and merchants. If the parties couldn't reach agreement, a three-judge panel appointed by the U.S. Department of Justice and the Federal Trade Commission would be empowered to impose one of the sides' final offers as binding for three years. The retail groups say that system would simply encourage free-market forces to work and limit what they see as the market power of Visa and MasterCard. Bankers and the card networks, however, say the bill establishes federal price controls on interchange. U.S. Sen. Richard Durbin, D-Ill., is considering an interchange bill, though he hasn't revealed details (Digital Transactions News, May 13).