Credit-Card Fee Reform Stays on the Back Burner

Store owners are pressing to have "interchange" fees reined in, but so far banks and card companies have prevailed

By Brian Burnsed

Credit-card holders got relief earlier this year when Congress pushed through legislation to eliminate some of the card industry's sneakier practices. But store owners, who have similar long-standing gripes about the transaction fees they're charged by banks and card companies, are getting little traction for their cause.

It's not for lack of trying. Retailers have spent years and millions of dollars lobbying for tighter rules on "interchange fees"—the non-negotiable 1.6% or so merchants pay to card-issuing banks each time a consumer buys something using a card. At an Oct. 8 hearing the House Financial Services Committee heard a small-store owner describe excessive and opaque fees the industry claims aren't held in check by competition and can wipe out already thin retail profit margins. Kathy Miller, owner of a grocery store in the 961-person town of Elmore, Vt., told the committee she may as well give small-ticket items away free because selling them costs her money after the interchange fees are accounted for. Currently, merchants are barred from demanding a minimum price for credit-card purchases. "We can't keep absorbing these fees," Miller said. "Some days I feel like I should just turn my keys in."

The complaints found a sympathetic ear in Congress. Three separate bills to rein in interchange fees have been introduced in the Senate and House. The toughest, from Senator Richard Durbin (D-Ill.), would give retailers antitrust protection so they could jointly negotiate lower rates. Also, merchants would have the option of not accepting cards that charge them higher fees, which are used to offer consumers rebates and perks. One of the House bills would let stores charge minimum and maximum amounts for card purchases. (The fees are split between the merchant's bank and the card-issuing bank. The card companies—Visa (V) and MasterCard (MA), mostly—claim they don't benefit directly from interchange fees, but they do collect fees from the issuing banks.)

Retailers vs. Banks

The problem for merchants is that while there is plenty of anger against banks and finance companies in the capital these days—as seen in moves to restrict bank executives' pay—their fight essentially pits two powerful industry lobbies against each other. Jaret Seiberg, an analyst at Stanford Group, believes powerful House Financial Services Chairman Barney Frank—who held the Oct. 8 hearing—is applying pressure on interchange fees only to get banks to give ground on the Obama Administration's proposed Consumer Financial Protection Agency. In his markup of legislation to enact that agency on Oct. 15, Frank struck a provision for interchange-fee reform. "I think the prospect of interchange legislation exploded in order to send a message to the banks to soften their opposition to consumer protection," says Brian Gardner, senior vice-president at investment bank KBW (KBW). "I have yet to ever meet a member of Congress who wants to get in the middle of that fight."

That may change if Congress becomes convinced that consumers are being gouged through the fees. A study, ordered as part of the credit-card reform law signed last May, is being conducted by the Government Accountability Office. If it finds that consumers are indeed hurt by the fees, the likelihood of overhaul legislation may improve.

The Merchant Payments Coalition, a retail lobbying group, claims consumers and merchants spent $48 billion on interchange fees last year. The group estimates that the figure has tripled since 2001 and is built into the cost of every product.

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