The House-Senate Conference Committee considering financial services reform legislation is on the verge of adopting provisions that could shake up the world of debit cards. 

After much controversy and intense lobbying by merchants and banks, key conferees have announced an agreement that preserves most of the Durbin Amendment and, remarkably, adds a critical and potentially groundbreaking new prohibition aimed at the networks and debit issuing banks.

While the situation remains fluid and things could change, if this agreement holds the merchants have won a huge victory.

In discussing where things currently stand, let’s start with the key provisions regarding debit interchange.

While the Federal Reserve still will be given the power to pass rules regarding debit interchange, those rules will not apply to federal, state and local government program prepaid debit cards.  Reloadable prepaid cards, such as the cards increasingly used by the unbanked, are also exempted.

In another change the definition of “interchange transaction fee” has been changed to prevent the Fed from regulating the fees that banks pay to Visa and other debit networks for membership except to the extent that such fees are used to undermine the interchange regulations.

Lastly, in a potentially significant change,  the Fed can now take fraud prevention costs into account in configuring rules  aimed at capping the amount that merchants will pay  for debit interchange but such costs can only be considered if a bank demonstrates that they are complying with standards established by the Fed to reduce fraud. 

That brings us to the most significant change that came out of the conference.  The initial legislation included a provision that prohibited the card networks from passing rules against merchants from offering discounts to favor one card network over another.  That provision has been removed.

Instead, the agreement includes a provision that directs the Fed to adopt rules that preclude debit network exclusivity that comes about by “contract, requirement, condition, penalty, or otherwise.”  This provision could effectively nullify the partnership agreements between numerous banks – particularly some of the largest banks in the country – and Visa, as those agreements have resulted in an increasing number of debit cards bearing on the Visa and Interlink. click here for more »

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. click here for more »

The European Commission has unveiled new draft rules for horizontal cooperation agreements as part of the EC’s Horizontal Guidelines and Research & Development and Specialization Agreement Block Exemption Regulations (BERs).

The new rules aim to clarify when companies’ horizontal agreements will be deemed to restrict competition and when such agreements will qualify for an exemption.  The rules include a new chapter on information exchange, and substantial revisions to the standardization chapter.  The revised rules also aim to prevent disputes over licensing fees charged by companies for their intellectual property rights once they become the standard.

Key issues addressed in the revised Horizontal Guidelines include:

• An assessment of information exchange between companies;
• Guidance on standard terms in the chapter on standardization;
• Clarification of the application of the competition rules to agreements between joint ventures and their parents; and
• Elimination of the “center of gravity test” which previously defined which parts of the guidelines were applicable to an agreement.

Key issues addressed in the revised R&D and Standardization Agreement regulations include:

• Disclosure of relevant intellectual property rights and readjustment of the “hardcore” restrictions;
• Introduction of a second market share threshold for specialization and joint production agreements pertaining to products used for internal consumption; and
• Clarifications to the notion of “potential competitor”, with the introduction of a three-year timeframe for future market entry.

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Federal regulators are on the verge of answering the question of “Where’s the beef?” in the Obama administration’s regulation of competition the meat industry.

The United States Department of Agriculture will soon release new proposed antitrust rules for the meat industry that could significantly alter the balance of power between farmers and the big companies that buy their meat.  Although the USDA has not said when the new proposed rules will be made public, the 2008 Farm Bill requires that they be put in place by summer, which means the announcement could be made any day now.

There is widespread speculation among activists, farmers and meat industry officials about how far the Obama administration will go in regulating competition in the industry.  The proposed rules are likely to address, among other things, when a company may lawfully choose to buy one producer’s cattle or hogs over another, and when poultry companies can require farmers to upgrade their chicken houses with new equipment.

The new rules may well prove to be the most sweeping antitrust rules for the meat industry in decades.  The Obama administration has already signaled an interest in greater regulation with a series of joint Department of Justice and USDA workshops on competition and regulatory issues in the agriculture industry.  The stringency of the new rules is likely to be a good indicator of the administration’s regulatory bent.

The meat industry anxiously awaits the new rules, which could affect the prices paid by the consumer.  Although the meat industry is already heavily regulated, the market has limited competition.  For example, only four companies buy and slaughter 80% of the beef in the U.S.  Likewise, poultry companies determine chicken prices and can compel farmers to upgrade their chicken houses even though farmers argue that the upgrades only benefit the poultry company.

It seems likely that the Obama administration will be proposing – and fighting for – regulations that are tougher and father reaching than any since the Great Depression.  The big meat industry companies are already gearing up to protest any rules they deem too strict.

The U.S. Court of Appeals for the District of Columbia decision in Comcast v. FCC – striking down the FCC’s Order prohibiting Comcast from discriminating against customers that download large video files – may seem like a significant defeat for the FCC, but it might turn out to be just the first skirmish in an escalating war.

The Court’s decision dealt a decisive blow to an argument used (once too often) by the FCC under Chairman Martin, attempting to ground the FCC’s jurisdiction on “ancillary authority.”  The Commission contended that it had the power to regulate ISPs from limiting consumer access to certain types of Internet content on a discriminatory basis (known as “net neutrality”), even though Congress has never given the FCC specific statutory authority to do so.  Rather, the Commission constructed a series of arguments that its regulatory power over the Internet – classified for the last decade by the FCC as an “information service” – derived from other statutory powers and congressional policy statements as to the FCC’s responsibilities. 

Conceding that Congress intended the FCC to have jurisdiction to keep pace with technological change, and that the Internet is the most important communications innovation of this generation, the D.C. Circuit nonetheless repeated its warning from prior cases:  “the allowance of wide latitude in the exercise of delegated powers is not the equivalent of untrammeled freedom to regulate activities over which the statute fails to confer . . . Commission authority.”

Questions immediately turned to the fate of FCC’s recently-announced, broadly acclaimed, National Broadband Plan.   Some elements of the Plan are founded more squarely in statutory jurisdictional grants and confirmations of authority – such as reclaiming broadcast spectrum for broadband uses, enhancing use of broadband for public safety, improving use of broadband in schools, and ensuring better competition for consumer electronics devices to access multichannel video programming (such as cable, satellite, and telco television content) – and will not be hindered by the decision.

So, for example, the Commission’s agenda to spur new competition for set-top boxes and to require a neutral “gateway” device to network together television and Internet content in the home, will remain on the fast-track this year.  Other elements, however, such as accelerating the rollout of broadband service to rural areas and low-income citizens, consumer protection, and net neutrality, will need to find an alternative source of Commission authority. 

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