Two More Congressional Bills Aim at Interchange Regulation

U.S. Sen. Richard Durbin's introduction this week of a Senate companion to U.S. Rep. John Conyers Jr.'s Credit Card Fair Fee Act of 2009, along with a little-noticed bill introduced last month in the House, bring to three the number of interchange bills pending in the Democrat-controlled Congress. And while the bill from Conyers, the Michigan Democrat who chairs the House Judiciary Committee, has received most of the publicity (Digital Transactions News, June 8), the bills from Durbin and U.S. Rep. Peter Welch, D-Vt., may represent the more serious threats to the bank card status quo. The Welch bill, H.R. 2382, would ban the card networks from setting higher interchange rates for premium cards than for non-premium cards. Welch's bill also would overturn many of the networks' longstanding rules to prevent merchants from discriminating against card-using customers. And Durbin's bill, S. 1212, revives the idea of federal payment-system judges to oversee interchange rate setting between merchants and the card networks. Conyers first proposed payment judges in his original draft last year, and Durbin, the Senate majority whip, followed suit in his chamber. They dropped the idea during the legislative process. Under Durbin's new bill, the U.S. attorney general and the chairman of the Federal Trade Commission would appoint three judges who would oversee a rate-setting process that would kick in if merchants and networks couldn't reach voluntary agreements on interchange after three months of negotiation. Whether Durbin's payment-judge proposal will get any farther than it did in 2008 is far from clear. The National Retail Federation issued a press release in favor of the bill, as it did earlier when Conyers introduced his Credit Card Fair Fee Act of 2009. But Conyers's pending proposal leaves out the panel of judges. “It's just so inefficient, it just bogs everything down,” says Bruce Cundiff, senior analyst at Javelin Strategy & Research, Pleasanton, Calif. “You can say the interchange system has its faults, but making it worse is not an option.” The Welch bill, which would amend the Truth in Lending Act, exhibits a “higher level of understanding” of the payment card system than the Conyers or Durbin bills, Cundiff says. The proposal to equalize interchange on premium, or rewards, cards and non-premium cards would strike a blow to the bank card networks' tactic of raising issuer revenues by increasing rewards card interchange rates. Issuers are pumping out ever-more rewards cards in part to capture that higher interchange revenue. Cundiff says issuers and networks make the argument that consumers spend more on rewards cards than non-rewards cards, benefiting merchants. “That's probably true, and it also lacks the realistic ability to link that benefit to a specific merchant,” he says. “So I don't necessarily have a major issue with creating this equity.” Cundiff notes that the bill would not regulate prices. “We're talking about equality among various products,” he says. But it could have the unintended effect of reducing the rewards issuers offer consumers, he adds. The other part of Welch's bill, dubbed the Credit Card Interchange Fees Act of 2009, would strike down a host of rules across the card networks aimed at preventing merchants from discouraging customers from using payment cards. If enacted: –Merchants would be free to accept one type of network-branded card but not another from the same network due to its cost. In other words, “honor all cards” rules would be out, as long as merchants didn't discriminate against individual issuers. –Merchants would be free to steer their customers to their preferred forms of payment, and they could establish minimum or maximum amounts for payment card transactions. Networks could not interfere in how merchants display prices. –Networks couldn't force merchants to accept cards in all their locations. Merchants could route card transactions using the processing options of their choice. Passage of the bill would look like a merchant victory, but it probably would not change things much in practice or damage the card networks, Cundiff says. That's because merchants' desire to please their customers by accepting whichever card they present usually overcomes their gripes about acceptance costs. “The implications in the real world I don't think are going to be all that great,” he says. “That's the fine line [merchants] have to walk. The individual merchants have to decide if this is going to hurt my business, or am I going to go after the card companies.”