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Thursday, February 21, 2008

Vermont interchange bill a cry for help

A bill introduced into the Vermont House of Representatives in January 2008, H.600, would force hard copy disclosure to Vermont merchants of the interchange fees set by Visa Inc., MasterCard Worldwide and other credit card companies.

Authored by Reps. Michael John Obuchowski, D-Windham, and Warren F. Kitzmiller, D-Washington, H.600 requires card Associations to furnish "a complete paper copy of the [interchange] rules referenced in the contract, either individually or through an acquiring bank."

The bill would also require that merchants be notified when interchange rates are modified and when new categories are implemented. And when a merchant signs a contract through an ISO to accept electronic transactions, H.600 would force that contract to contain the "complete schedule of interchange fees, credit card and debit card transaction rates, and any other fees that the financial institution charges to merchants."

What is more, under H.600, the card Associations would need to explain to each merchant which rates apply to that particular merchant and what transaction situations would trigger one interchange rate to be charged over another.

H.600 furthermore states that merchants would not be required – as a condition of receiving access to card Association rules and regulations – to sign a confidentiality agreement with the card Associations that reportedly bans merchants from freely discussing interchange rules.

Moreover, if the card Associations do not meet these obligations, H.600 maps out the price they would pay: inability to collect from merchants on chargebacks or any interchange fees until the rates and rules are properly disclosed; civil penalties of $10,000 against the card Assocation per charge imposed on the merchant; and merchants' right to sue card Associations in the event of a dispute over interchange.

At a hearing at the House Committee on Commerce on Jan. 22, 2008, Jim Harrison, Executive Director of the Vermont Grocers' Association, voiced the association's support of H.600. "Merchants should be given the operating rules," Harrison told The Green Sheet.

Harrison does not see why, in theory, the card Associations would oppose the bill. "I'm not sure the concept is a tough battle," he said. H.600 is not interested in changing what the card Associations can or cannot charge; it's about transparency, he added.

Stalled in committee

But Kitzmiller is not so diplomatic. "[H.600] is not going to make it out of my committee," he told The Green Sheet. "The way the bill is drafted would harm local banks."

A state law would have no jurisdiction over the actions of federally chartered acquiring banks such as Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc. H.600 would only affect local, state chartered banks in Vermont.

Kitzmiller said the bill is actually "a cry for help" to get the federal government involved.

Vermont's Department of Banking, Insurance, Securities & Health Care Administration (BISHCA), which regulates the state's banking system, opposes H.600.

"What is a disclosure never got properly defined [in the bill]," said Thomas J. Candon, Deputy Commissioner of the Banking Division of BISHCA. However, he noted that some of the issues addressed by the bill are valid. "There are some excesses that go on as far as fees are concerned," but that "needs to be taken care of at the federal level," he said.

Characterizing the battle as "David versus Goliath," Kitzmiller said interchange costs for Vermont's merchants are "rising at a very rapid rate," and for some businesses, the sum total of interchange "exceeds their net profits," and for many it "exceeds gross profits."

Kitzmiller alluded to Visa and MasterCard's control of 80% of the credit card market and said they can do "exactly what they want" and have been "successful getting federal policies aligned with their wishes."

Given their power, Kitzmiller wondered what the card Associations could be afraid of and questioned why they don't spell out for merchants exactly what interchange rates they are being charged.

He added that he has "utterly no sympathy whatsoever" for "jacking up consumers' fees, jacking up merchants' fees. These people would steal Aunt Tillie's last nickel with a smile if they could get their hands on it."

Kitzmiller, who once owned a small sporting goods store, said interchange has risen "dramatically" over the last five years, and he was "very, very angry" at the increasing burden of interchange on merchants.

Candon was under the impression that Kitzmiller had already set H.600 aside to concentrate on drafting a resolution to the U.S. Congress concerning interchange.

A bill similar to Vermont's H.600 has been introduced in the New York State Assembly.

Visa and MasterCard's interchange rates are posted on The Green Sheet's Web site at www.greensheet.com/industry_resources.php . end of article

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