Credit-Card Fee Reform Stays on the Back Burner

(page 2 of 2)

The credit-card industry counters that rising fees simply reflect the explosion of credit-card use—which roughly tripled for Visa cards, to $1.5 trillion, from 1998 to 2007. The Electronic Payments Coalition, the card lobby, contends that consumers and retailers benefit enormously from the resulting convenience and network security the fees help support. It notes that McDonald's (MCD) saw a 20% boost in transactions after the chain started to accept credit cards in 2004.

Not surprisingly, the two sides disagree sharply over whether shoppers would see any savings if interchange fees were lowered. The card lobby insists that business owners would just keep the money. "I think they'll absolutely pocket the difference," says Trish Wexler, spokesperson for the Electronic Payments Coalition. "Why would they [pass savings to customers]? Are they spending millions and millions of dollars on lobbying and advertising so they can help their customers get a break? Of course not. They're doing it because it will increase their bottom lines."

Some outsiders experts believe, though, that given the nature of retailing, stores would be forced to lower prices. "If merchants are in a competitive industry, when their own costs drop, those costs get passed along to consumers," says Adam J. Levitin, associate professor of law at Georgetown University. "No one would question that for any other cost of doing business—that if a cost drops, some of it would be passed on."

Effect on Credit Unions

The credit-card lobby also argues that small regional banks and credit unions would be harmed if any legislation were to pass. The Price Chopper Employees Federal Credit Union near Albany, N.Y., which serves 4,700 members in the Northeast, is wary of any changes. "For us to incur a ceiling on interchange fees would really hamper our ability to offer credit-card services," says credit union CEO Dawn Donovan. "We're competitive, our rates are really low, we'd hate to have to raise our rates to compensate."

But the concerns of small banks may be easily eased even if reform passes. One of the bills, proposed by House Judiciary Committee Chairman John Conyers (D-Mich.), excludes from any new restrictions credit unions and banks with less than $1 billion in assets.

The larger issue for retailers, especially small-business owners, is that they want more control over what types of cards they accept and when they have to accept them. Now, if merchants opt to accept Visa or MasterCard, they must accept all Visa- or MasterCard-branded cards even though different cards under one brand carry different rates. And they must accept card payment no matter how low the purchase price.

If allowed, smaller merchants probably would be more hesitant to accept rewards cards, which in Visa's case carry interchange fees as high as 2.4% per transaction, compared with Visa's roughly 1.6% average interchange rate. While this would keep merchants from having to subsidize the rewards of their customers, it might eliminate free rewards cards altogether, since banks would likely be unwilling to pay the rewards out of pocket.

The battle over card fees has been nearly invisible, buried under the high-decibel debates over health care and financial reform. But Mallory Duncan, general counsel of the National Retail Federation, is confident that some reform measure will pass in the near future, giving relief to store owners. "There are many paths to heaven," he says. "Our heaven is a transparent, competitive market, so we're happy no matter how we get there."

With reporting by John Tozzi in New York

Burnsed is an editorial assistant for BusinessWeek based in Atlanta.

Business Exchange

Track and share business topics across the Web.