Merchants in the United States are on the verge of a significant victory in their long struggle to limit credit and debit card fees.
The Senate has approved an amendment to its financial reform bill that curtails the power of the card issuers in significant ways, including requiring that the “interchange fees” charged by banks on fees on debit card transactions be “reasonable and proportional to the actual” costs of processing those transactions, and permitting merchants to offer discounts for cash payments. Whether those limits are enacted into law, however, remains to be seen since the Senate bill must still be reconciled with the House financial reform bill – which does not contain the amendment.
Interchange fees are set by the credit card networks (Visa, MasterCard, Discover and American Express) to banks that issue those networks’ branded cards. When a merchant accepts a credit or debit card, it loses a small percentage of each purchase price to the issuer through this fee. For Visa and MasterCard transactions, which dominate the credit and debit markets, the fees vary from 1.5 to 2 percent of the price for credit card purchases and are approximately 0.75 percent for an average debit card purchase. These little fees add up to big money: they totaled an estimated $48 billion in 2008.
Merchants have lobbied Congress to limit or eliminate interchange fees for years. And a federal merchants’ putative class action in New York claims that Visa’s and MasterCard’s interchange fees result from price-fixing in violation of Section One of the Sherman Act. According to the plaintiffs, Visa and MasterCard set their interchange rates through collusion with their member banks, which compete with each other: that is, price-fixing by competitors with the networks as facilitators.
The Senate has now given the merchants a major win by adopting an amendment by Senator Richard Durbin (D – Ill.) to the financial reform bill. That amendment passed by a solid bipartisan vote of 64-33 despite fierce lobbying by Visa and MasterCard.
Durbin’s amendment would reform the debit card interchange system in two ways. First, it would require debit card interchange fees to be “reasonable and proportional” to the issuers’ actual costs. This provision addresses complaints that interchange fees, while purportedly compensating card-issuing banks for their transaction costs, in fact has steadily climbed out of proportion to such actual costs. And the networks have continued to raise those rates in the United States at the same time as they have lowered them abroad in the face of foreign regulatory pressure, further fueling complaints that they are higher here than necessary.
Second, the amendment would direct the Federal Reserve System’s Board of Governors to establish standards for assessing whether interchange rates meet the “reasonable and proportional” standard described above.
Small issuers – those with less than $10 billion in assets – are exempt from both provisions above. This “small bank” exception reportedly would exempt 99 percent of all banks and credit unions. Thus in effect the interchange provisions of the Durbin amendment would affect only the largest issuers, which make the most money off these fees; 80 percent of the interchange revenue in 2008 went to just ten large banks.
The Durbin amendment would also go beyond interchange to address a trio of practices that have riled merchants for years. Networks would have to let merchants offer discounts to encourage the use of particular card brands. For example, Visa could not forbid a supermarket from offering discounts for the use of Discover credit cards (or the signature debit cards of Discover’s subsidiary Pulse).
Networks would also be forced to allow merchants to offer discounts to encourage the use of particular payment forms. Thus MasterCard would have to allow a store to give discounts for customers paying with cash or check rather than plastic. And networks would have to allow merchants to set “floor” and “ceiling” limits if they chose. This is important to merchants because some sales, particularly low-dollar-amount ones, do not yield enough revenue to make them profitable after the merchant pays the interchange fee.
So what next? The House of Representatives has not added any provisions like the Durbin amendment to its financial services reform bill. For the amendment to become law, therefore, it would have to survive the upcoming conference committee in which House and Senate representatives reconcile their different versions of the reform legislation. It is too early to tell how Durbin’s amendment might fare in that battle. But for now, merchants are relishing the first major victory that they have had on this issue – whether in court or in Congress – in years.