Progress in Processing

Convenience store operators’ turbulent relationship with the credit card industry is set to enter a new phase in 2009 as a pair of legislative initiatives—one for consumers, the other a point of serious contention for retailers—come front and center.
From both angles, facing off with credit card companies over the huge profits they’ve been reaping at retailers’ expense should prove a watershed moment for this increasingly competitive industry.
“First of all you need to keep in perspective that there are two distinct bills out there,” said Lyle Beckwith, senior vice president of government relations for NACS. One is the Credit Card Bill of Rights (CCBOR), which at press time had just been passed by the House. The other is the Credit Card Fair Fee Act (CCFFA), which was passed by the House Judiciary Committee.
The CCBOR bill that passed the House dealt with rules and regulations that credit card companies place on consumers, such as double billing. While important, “those issues are also going to be dealt with by the federal government in the form of regulation, not legislation,” Beckwith said.
Among Washington insiders, the CCBOR bill was “viewed purely as a political vote, so legislators could go home and say they voted for something,” Beckwith said. “It was really a political move for them to have something to campaign on. Hopefully it’s going to pass this year.”
What Beckwith termed the “real meat” will come next year when the Credit Card Fair Fee Act begins moving again. The CCFFA is legislation that deals with credit card interchange, which is primarily of interest to convenience store operators. “We believe that the sheer magnitude and hidden nature of interchange fees makes that the most important issue in terms of credit card reform,” Beckwith said.
The credit card industry has come under increased scrutiny from the public, consumer groups, the Federal Reserve and Congress in the past three years for what some allege are unfair credit card practices, policies and fees. Interchange fees have been the subject of hearings three times in recent years under both Republican- and Democratic-led Congresses. They have been called the biggest credit card fee that no one’s ever heard of. The reported $42 billion in interchange fees paid by retailers and consumers in 2007 dwarfed most other credit card fees put together, including late fees, over-the-limit fees, annual fees and inactivity fees.
Interchange is a percentage of each transaction that credit card companies’ banks collect from retailers every time a credit, and to a lesser extent, debit card, is used. The fee varies with the type of card, size of merchant and other factors, but as much as $2 of every $100 spent is said to go to card issuers. 
Visa and MasterCard each work with their member banks collectively to set the price of interchange fees. Some have charged that this amounts to illegal price fixing, and that it hurts consumers and merchants.
The CCFFA “in essence acknowledges that the credit card companies and banks have been operating as a duopoly, or in concert, to set rates,” Beckwith said. “What it recognizes is that retailers have no leverage, and so it will give a limited anti-trust immunity” allowing retailers to get together and negotiate rates and rules with the banks and credit card companies on interchange.
The Merchants Payments Coalition (MPC) in Washington, a group of retailers, supermarkets, drug stores, convenience stores, fuel stations, on-line merchants and other businesses, is fighting against what it calls “unfair” credit card fees and a more competitive and transparent card system that’s better for consumers and merchants alike.
The coalition’s member associations collectively represent about 2.7 million stores with approximately 50 million employees. 
Leveling the Playing Field
The new legislation would help level the playing field for retailers. There are, at present, no negotiations. Credit cards are offered on a take-it-or-leave-it basis, which would not be an issue “were it not for the fact that Visa and MasterCard control 80% of the market,” Beckwith pointed out. “Because of that, NACS members are forced to accept Visa and MasterCard.” 
While many operators refuse to accept American Express for a variety of reasons, Beckwith added, “You can’t operate a gas pump without taking Visa and MasterCard these days. Had this all occurred 30 years ago before everyone was using cards at the pump there would have been negotiating. But at the time the interchange wasn’t the issue that it is today.”
The House passed the Credit Cardholders’ Bill of Rights Act in September. Congressman Peter Welch (D-VT) said the bill was only “the beginning of important reforms in credit cards—the beginning of increased protection for consumers of credit card companies. The other side of the coin, which we’re not taking up today but will hopefully get to, is for merchants who pay fees to credit card companies for every single credit card transaction—the so-called interchange fees.”  
Those fees, Welch continued, “are the highest, the highest, in the entire world, accounting for as much as 2% of the cost of every credit card transaction, in some cases a good deal more. These bloated fees are passed on to the consumer. The average American family in fact pays an extra $300 a year in items they purchase as a result of credit cards.”
H.R. 6248, the Credit Card Interchange Fees Act, would require credit card companies to disclose their interchange rates, terms and conditions to consumers, businesses, and the public. In addition, the bill would empower the Federal Trade Commission (FTC) to review these rates and rules and prohibit any practices that violate consumer-protection or anti-competitive laws.
MasterCard declined to respond to a phone request for an interview. On its Web site, however, the company notes that “a number of merchants and merchant trade groups have filed several lawsuits alleging that the U.S. interchange fees that MasterCard establishes violate antitrust laws, and that the cost of interchange is too high. MasterCard believes that these lawsuits are without merit, and a clear demonstration of certain merchants wanting the significant benefits of accepting payment cards without having to pay for the value of the services they receive. Furthermore, these lawsuits are being driven by class action lawyers whose primary motive is to extract enormous fees for themselves.”
Visa, which likewise did not respond to a request for comment, noted on its Web site under the headline Facts About Interchange that, among other things, interchange “is consistently monitored and adjusted—sometimes increased and sometimes decreased—in order to assure the economics and value of the transaction are balanced for all parties. Such adjustments enable Visa to expand the types of payments consumers can make with their cards, including payments for small-ticket items, rent, utilities and even mass transit. Merchants and consumers do not pay interchange. Merchants pay what is known as a merchant discount or merchant service fee, which is negotiated with their financial institution and may include interchange…So imposing price caps on interchange would not necessarily lower a merchant’s costs for card processing.”
Looking Ahead
While NACS certainly does not oppose the CCBOR, its main issue is the CCFFA, Beckwith said. “That’s where all of our efforts are going,” he added. “With the combination of litigation and legislation, and the potential for regulation, there are three flywheels moving at once.”
The litigation Beckwith is referring to is a class-action suit filed three years ago. NACS was one of four major merchant associations that filed the antitrust suit alleging that Visa, MasterCard, Bank of America, Citibank, Bank One, Chase Manhattan Bank, J.P. Morgan, Chase, Fleet Bank, Capital One and other banks were engaging in collusive practices by setting credit card interchange fees at supra-competitive levels. 
The lawsuit was filed in the U.S. District Court for the Eastern District of New York. The other plaintiffs are the National Association of Chain Drug Stores (NACDS), the National Community Pharmacists Association (NCPA) and the National Cooperative Grocers Association (NCGA).
All Retailers Affected
For many small retailers, the cost of interchange fees is taking its toll, according to the Web site “For example, gasoline retailers, 90% of whom are small business owners, paid more than twice as much to the credit card industry ($7.6 billion) as they made in pre-tax profits ($3.4 billion) in 2007.”
Dan Willie, owner of Travelers’ Oasis and the 14 Oasis Stop ‘N Go stores in Twin Falls, Idaho, said there are “more people using credit cards because of the economy, and second, the price of things like gas is up.”
Support for the legislation is coming from all sides. When it comes to the CCFFA, “we had just as many Republicans as Democrats as cosponsors,” Beckwith said. “It was passed out of committee with a majority of Republicans and Democrats.”
The Credit Cardholders’ Bill of Rights, on the other hand, had one Republican cosponsor: Rep. Chris Shays of Connecticut, known as a liberal Republican. Its passage through the Financial Services Committee was a partisan affair, Beckwith pointed out. “A lot of people voted for it, again, because they knew it wasn’t going to be enacted. The Senate wasn’t going to work on it and they didn’t want their opponents saying, ‘You voted against regulating credit cards.’”
CCFFA would give c-store operators a degree of leverage by permitting unity. “It allows all the retailers, small or large—everyone from a single-store operator to Wal-Mart—to get together in one room as one entity and negotiate across the table with Visa and their banks, and then MasterCard and their banks,” Beckwith said. “Originally, the legislation in the House reverted to a three-judge panel if there was no consensus after 90 days. Both sides would submit their best offers to the panel, which would choose which of the two best resembled market conditions that would occur in a competitive market.” 
A single negotiator would act on behalf of retailers, and would reconvene every three years under the proposed law. 
During the vote for the Credit Card Bill of Rights, the floor manager, Democratic At-Large Congressman Peter Welch of Vermont, indicated that “this is just the beginning,” Beckwith recalled, “and that in fact the much broader issue needs to be addressed next Congress, including the CCFFA. He specifically mentioned interchange as a problem that needs to be addressed.”
And, finally, it is going to be. CSD

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