Merchants Welcome Fed Conference on Credit Card Fees

The Federal Reserve Bank of Kansas City is scheduled to hold a conference on interchange rates May 4-6 in Santa Fe, New Mexico. The Merchants Payments Coalition will be represented at the conference by Duncan, Hatcher and Zlotnikoff. Interchange, a fee that is collectively set by Visa and MasterCards member banks, is a percentage of each transaction -- sometimes accompanied by a flat fee -- that banks collect from retailers every time a credit or debit card is used to pay for a purchase, adding up to billions of dollars each year. Visa and MasterCard together make up 90 percent of the U.S. credit and debit card business. Complex fee structures make it difficult to precisely calculate an average interchange rate, but a recent Morgan Stanley report found that a weighted average for Visa and MasterCard interchange had increased from 1.58 percent in 1998 to 1.75 percent in 2004 (an increase of 10.8 percent) and is forecast to grow to 1.86 percent in 2010 (an additional increase of 6.3 percent over 2004 and 17.7 percent since 1998). With the growing use of plastic, the dollar volume of interchange collected has grown from $9.4 billion in 1998 to $17.4 billion (an 85 percent increase) and is projected to reach $32.4 billion in 2010 (an 86 percent increase over 2004 and 244 percent since 1998). The latest rise in interchange rates came April 1, when Visa and MasterCard imposed a series of significant increases. Some of the new rates are as high as 2.9 percent, particularly for new premium cards. In addition to increasing rates, Visa and MasterCard are urging consumers to move to the higher-rate premium cards and away from lower-rate standard cards. Banks say they charge interchange to make up for bad debt or fraud. With fraud costs consistently decreasing in recent years, however, the costs interchange is intended to cover arent nearly as much as the amount charged, and banks already make huge profits from cardholder interest and fees. Moreover, the coalition believes that much of the fraud that interchange is intended to cover is the fault of banks poorly designed card programs, not the fault of merchants. The coalition is looking at a variety of avenues to help U.S. merchants obtain more reasonable interchange rates. Among other steps, the coalition is examining regulations recently adopted or under consideration around the globe: Australia adopted regulations in 2004 restricting interchange rates, the European Union is adopting restrictions and Great Britain is examining the issue as well. U.S. interchange rates are roughly three times Australian levels. The Merchants Payments Coalition is made up of trade associations representing retailers, restaurants, supermarkets, drug stores, convenience stores, gas stations, on-line merchants and other businesses that accept credit and debit cards and are concerned about the increasing interchange fees charged by banks and credit card companies to process credit and debit transactions. A number of the associations were involved in antitrust litigation settled in 2003 that forced Visa and MasterCard to lower interchange rates for signature debit transactions. Coalition members include the American Petroleum Institute, the Food Marketing Institute, the National Association of Chain Drug Stores, the National Association of College Stores, the National Association of Convenience Stores, the National Council of Chain Restaurants, the National Grocers Association, the National Restaurant Association, the National Retail Federation, NATSO (the National Association of Travel Plazas and Truckstops), the Petroleum Marketers Association of America, the Retail Industry Leaders Association and Shop.org. The coalition estimates that interchange collected from its members accounts for about one-quarter of U.S. interchange.