The debate over interchange regulation continues on. Most recently, the National Retail Federation took issue with the failure of the newest version of the financial services reform bill to tackle the contentious topic. The NRF argues that the consumer protection bill is not complete without addressing the rising costs of interchange for merchants and, by proxy, consumers.
But payments industry experts counter that regulating that percentage fee assessed by the card issuers on each electronic transaction (paid by merchant acquirers by way of processors, but ultimately imposed on merchants who, in turn, pay for it by raising prices for consumers) would not achieve its ultimate goal of reducing consumer costs.
Senate Banking Committee Chairman Sen. Christopher Dodd, D-Conn., unveiled the Restoring American Financial Stability Act of 2010 on March 15, 2010. While Mallory Duncan, the NRF's Vice President and General Counsel, was pleased with many aspects of the bill in curtailing "excesses of the financial services industry," he was disappointed by the "glaring omission" of "swipe fee reform" in the bill.
Given that Dodd has "voiced strong support for addressing the interchange issue in the past, ... we'd like to see it included in the final version of the bill," said J. Craig Shearman, Vice President, Government Affairs Public Relations at the NRF.
On the other side of the debate, Sharon Gamsin, Vice President and Senior Business Leader, Worldwide Communications, at MasterCard Worldwide, said, "We believe Sen. Dodd was right not to include interchange in his legislative proposal, as regulation of interchange has been shown to hurt, rather than help consumers," she said.
The Food Marketing Institute, a founding member of the Merchants Payments Coalition, said interchange averages 2 percent per transaction, "nearly twice the average supermarket industry profit margin." Additionally, the FMI reported that interchange cost merchants $48 billion in 2008, "inflating the cost of everything American consumers buy."
The NRF agreed with that $48 billion figure and compared it to $16 billion collected by the card brands in 2001 - when the federation began tracking that data. "As a result, the average household paid an estimated $427 in higher prices in 2008, up from $150 in 2001," the NRF said.
But Trish Wexler, spokeswoman for The Electronic Payments Coalition, of which the card brands are members, disagrees. "Interchange rates have actually stayed constant for the last decade," she said. "So that is a disingenuous argument that they're making. What has changed is that more people are using their [network-branded] cards. And so while the percentage - the rate - has stayed the same, the retailers are paying more in that line item in their expenses because more people are using cards. But studies have shown that when people use cards - be it debit, be it credit - they spend more and retailers make more. So while [merchants] might be spending more on cards, they're also making more [profit] as a result."
Wexler does not believe the NRF's stance is based on what is best for consumers, but what is best for its constituents: retailers. Merchants don't want "to pay their fair share of the electronic payment system that brings them more profits, more customers and guaranteed payment," she said. "And they want to find a way to ultimately have their customers pay for that fee instead. That's what they're trying to do."
The Reserve Bank of Australia moved to regulate interchange in 2002. According to Wexler, the regulations did not result in lower costs for consumers. "But someone did profit, and those were the merchants," she said. "So they kept the difference. There was no evidence that they passed any savings along to their customers."
Chris Monteiro, Group Head of Worldwide Communications at MasterCard, added that Australian consumers have been "hurt by higher fees to use their cards, fewer rewards and sometimes surcharges."
Adil Moussa, Analyst at payments industry consultancy Aite Group LLC, said the battle over interchange is a classic struggle of competing interests. "You have the banks on one side that want to make more money, and you have the merchants on the other side that want to keep more money," he said, adding that interchange is therefore a free-market contest between card issuers and retailers, not a consumer protection issue. Moussa also noted that coming in the wake of passage into law of the Credit Card Accountability, Responsibility and Disclosure Act of 2009, Dodd's consumer protection-focused bill does not need to impose even more regulation on banks.
"We have to have laws in order to protect us from some unfair practices," Moussa said. "But demand and supply is a pretty good regulator of the market itself. ... I think just leave the market to its laws of demand and supply. It has been doing pretty well."
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