New legislation could lower credit card interchange fees – Pacific Research Institute

New legislation could lower credit card interchange fees

A subcommittee of the U.S. House Judiciary Committee recently began considering legislation that would control the rising interchange fees credit card companies charge to merchants who accept plastic from their customers. Titled the Credit Card Fair Fee Act of 2008 (H.R. 5546), the bill was introduced by Rep. John Conyers (D-Mich) in early March and sent to the House Judiciary Committee Antitrust Task Force for hearings that began May 15.

The proposed legislation would require credit card companies with “substantial market power” (like Visa and Mastercard who represent a combined market share of more than 80%) to negotiate those fees with merchants, putting a stop to the credit card companies’ ability to collectively set non-negotiable fees. In the event the credit card companies and merchants couldn’t come to an agreement, both sides would be required to submit their final offers to binding arbitration by a three-judge panel appointed by the Department of Justice and Federal Trade Commission.

The bill has the backing of the Merchants Payments Coalition, representing the support of some 2.7 million U.S. retailers, department stores, supermarkets, drug stores, gas stations, convenience stores and online merchants. The MPC’s Web site,, provides more information including updates on the bill’s status in Congress, a list of supporters and links to the e-mail addresses of the elected officials who will eventually be voting on the bill.

One of MPC’s members, the National Retail Federation, estimates that Visa and Mastercard collected about $42 billion in interchange fees in 2007, an amount that has been steadily increasing and could top $48 billion in 2008.

The NRF projects that a good chunk of those annual credit card interchange fees are eventually passed on to the consumer, costing the average U.S. family more than $400 this year, up from $378 in 2007, and nearly triple the $159 paid in 2001, the year the NRF began tracking interchange.

Depending on who you talk to, the interchange fees average somewhere between 1.75% and 2% of the transaction value. Daniel Ballon and Lawrence McQuillan of the Pacific Research Institute, in an op-ed piece for the Washington Examiner (May 26, 2008) put the average at 1.75%. They also said that these fees are what enable banks to offer a variety of free cards with generous rewards to consumers; that credit card companies return between 1% and 5% of the purchase price back to about 85% of card users in the form of rewards programs; and that passage of the Credit Card Fair Free Act “would, by taking money away from credit providers and handing it to merchants, increase the profits of big retailers and impose higher costs on credit card users.” According to Ballon and McQuillan, this would result in “fewer cards, higher annual fees, rising interest rates and the end of rewards programs.”

However, a 2006 report by Chicago’s Diamond Management and Technology Consultants Inc. found that only 13% of the collected interchange fees is needed for actual transaction processing costs, with most of the rest going to rewards programs and profits. Unless I missed something here (and the “transparency” of the fee structure is another hot button for proponents of the bill), after deducting for processing costs and consumer rewards, that leaves Visa and Mastercard with a profit of about 80% of last year’s $42 billion collections.

One of the bill’s banking opponents, Utah Bankers Association President Howard Headlee, told the Salt Lake Tribune in March that the fees are reasonable because the banks assume the risks of credit card fraud.

Opposition to the bill also comes from the Electronic Payments Coalition, an organization of payment card networks, financial services companies and financial services trade associations that, in a May 15 press release, described the legislation as “ill-conceived” and “nothing short of price controls.”

The Electronic Payments Coalition also said that the proposed three-judge panel “of politically-appointed bureaucrats who would ‘determine rates and fees’ for this highly complex and vast system could never replicate the delicate balance currently established by the free market. Such policy would bring harm to consumers, to the community banks and credit unions that receive interchange revenue, and to the viability of the worldwide electronic payments system.” The coalition is also concerned that “merchants would also feel the pain of such an economic disaster,” merchants they describe as “the very entities that are seeking price controls for their own financial gain.”

If you haven’t had a chance to voice your opinion on the proposed Credit Card Fair Fee Act to your elected congressmen and would like to do so, you’ll find everything you need at

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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