Significant changes to the payments industry seem all but foregone following the U.S. Senate's approval of the sweeping financial reform bill on May 20, 2010. Along with the stricter regulation of practices that include consumer lending and derivatives trading, the bill contains provisions about merchant card acceptance and debit card-based interchange fees.
The Restoring American Financial Stability Act of 2010, which passed the Senate on a 59 to 39 vote, must now be combined with a similar bill passed by the U.S. House of Representatives; if that reconciliation bill is approved by both chambers of Congress - and there is broad agreement that it will be - it will go to President Obama to be signed into law.
The Senate bill contains provisions relating to payment card use and acceptance, and observers say it is unlikely any of them will be dropped from the pending reconciled bill.
One is that it gives the Federal Reserve the authority to ensure that interchange fees charged for debit card purchases are "reasonable and proportional" to the processing costs incurred by the card issuers setting the fees.
What "reasonable and proportional" precisely means will be determined by the Feds, as the provision does not cap interchange at a specific, predetermined level.
As it stands now, the bill only calls for regulating debit card, not credit card, interchange; it also exempts card issuing banks with assets under $10 billion from fee restrictions. Still, many in the industry worry that regulating interchange in any fashion potentially opens the way for broader and more severe regulations.
Regulating interchange is a "tax on the system, and it could involve rules that are extremely difficult, if not impossible, to follow," said Ken Musante, founder of Eureka Payments LLC, a Calif.-based merchant services firm.
"The rule makers don't have a full understanding of the card payments network, and the precedent of them regulating interchange is like the camel's nose under the tent: once that happens, you don't know what else you're going to see," he added.
The bill also contains a provision allowing merchants to set a minimum dollar amount for all payment card purchases and to offer discounts to consumers who pay with cash, both of which are currently forbidden under the Visa Inc. and MasterCard Worldwide rule structure; however, some merchants have long engaged in such practices in defiance of the brands.
The Senate bill also requires that credit card companies follow the laws of states in which a given card is used for leveling charges on consumers - and not those where the card companies are headquartered, which is the current practice.
Card brands and issuers argue that interchange is a necessary fee for offsetting processing costs and that restricting interchange would stifle the industry's growth, make it harder for certain merchants to link with credit processing networks, prompt a rise in different merchant service fees to offset losses stemming from interchange reduction and curtail consumer rewards card programs funded with interchange money.
Paul Martaus, President of payment consultancy Martaus & Associates, said lobbyists for the card issuing sector have limited clout in the face of the hostility toward big banks and other financial behemoths that has helped push the regulation bill forward.
Martaus said Congress would have been more easily swayed by arguments from merchant service providers - which, he contended, would also be hurt by interchange restrictions - but the merchant acquiring sector lacks an effective lobby.
"Visa and MasterCard and the banks have their own lobbies, but nobody is working on the side of merchant services organizations," he said. "The ETA [Electronic Transactions Association] is an incredibly effective trade organization, but it's not made of professional lobbyists, and so far they've only been able to muster a very nicely worded answer to this.
"A merchant services provider might be able to come up with a better argument that makes more sense than what the issuers have done. Visa and MasterCard only want to discuss the problems of the issuing side. But everybody's angry about the Wall Street bailout and the banks, and the arguments are not ringing true."
Not everyone in the merchant acquiring sector opposes interchange regulation, however. Brian Relph, an Illinois-based merchant level salesperson with Merchant Services of North America, said he agrees with the contention of many merchants that fees leveled on card transactions are unnecessarily high.
Relph said merchants commonly blame ISOs, with whom they have the most face-to-face contact, rather than the issuers whom Relph believes are most to blame for excessive costs.
"In some cases I'm viewed as the enemy, and I try to point out that I'm not, that the banks are the enemy, that we sell an interchange program with very small markups and no ancillary [fees]," he said. "A lot of processors have a list of fees so long ... and the issuing banks, which really control Visa/MasterCard, can do anything they like. But merchants look at salespeople, at the ISOs, as the people that are doing it."
An amendment to the financial regulation bill introduced by Sen. Tom Harkin, D-Iowa, to cap ATM transaction fees at 50 cents was voted down earlier this week.
Meanwhile, a separate bill that targets the controversial practices of certain online merchants was introduced May 19, 2010. The Restore Online Shoppers' Confidence Act, introduced by Sen. John D. Rockefeller, D-W.Va., proposes a ban on certain "deceptive" tactics used by some online merchants.
Those include bans on giving customer payment information to third-party merchants; on charging consumers for a product or service following a free trial period without providing a notifying email at least 10 days prior to leveling those charges; and on using "negative options" (pre-checked boxes) in charging consumers for a service.
According to Musante, whose com-pany specializes in acquiring "continuity" merchants that offer free trial periods followed by recurring billing, the Visa and MasterCard rules already cover some of the provisions in Rockefeller's proposal, although they weren't strictly enforced until recently.
Musante said he supports the Rockefeller proposal as long as it doesn't conflict with the existing rules.
"It will be very difficult if the rules are in conflict with card [brand] rules, or written in an ambiguous fashion," he said. "But if they're clear and conform to the card networks, it will actually make things easier by providing greater clarity and more uniformity to the rules."
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