The Green Sheet Online Edition
July 28, 2008 • Issue 08:07:02
Insider's report on payments
Approaching a crossroads
The acquiring sector is at a crossroads. After years of relative public obscurity, the business has attracted the attention of lawmakers and an electorate that includes hundreds of thousands of small businesses grappling with economic uncertainties.
Yes, those would be the same economic uncertainties you and I face each day. The big difference is that these folks have been working and playing with lawmakers for years. They're keenly aware of the rules of engagement in Washington and state capitals, and they're determined to force changes to - if not the elimination of - card interchange. It's time for acquirers and ISOs to take a public stand or risk extinction.
With all deference to the Electronic Transactions Assoc-iation - which I believe is doing a commendable job establishing a foothold in Washington - the retailing sector is riding roughshod over the acquiring sector on the issue of interchange.
Retailers are better organized and better funded to promote their legislative agenda than acquirers and ISOs. In Washington, alone, there are multiple large trade associations dedicated to advancing retailers' interests, including the National Association of Convenience Stores, the National Restaurant Association and the National Retail Federation.
Just one of those groups, NACS, spent $1.5 million on Washington lobbying efforts in 2007.
Together with scores of other merchant groups, and empowered by legal actions like the infamous Wal-Mart Stores Inc. case (which resulted in the out-of-court settlements in which MasterCard Worldwide and Visa Inc., in effect, conceded they had treated merchants unfairly in the past), these groups are committed to forcing changes in the interchange model.
And despite the relatively short time left before lawmakers hit the campaign trails, retailers have already made inroads. As I began this column, the U.S. House Judiciary Committee, which has been making headlines recently with heady issues like national security and fuel prices, approved the Credit Card Fair Fee Act of 2008, following an aggressive grass roots movement led by the Merchants Payments Coalition.
Those opposed to the status quo, not surprisingly, are trying to ride the tide of public opinion on rising gasoline prices to garner support for changes in interchange, portraying it as a consumer issue.
According to published reports, the Judiciary Committee debated the Credit Card Fair Fee Act for four hours before a coalition of Democrats and Republicans managed to garner approval of the measure by a vote of 19 to 16. Those reports also indicated that there was an apparent lack of consensus among lawmakers on whether the bill would benefit consumers.
In its current form, the Credit Card Fair Fee Act would create an exemption to antitrust laws so that retailers can band together and negotiate lower interchange - directly with Visa and MasterCard.
"The days when Visa and MasterCard are able to impose exorbitant fees on consumers are numbered," NACS Chairman Richard Oneslager declared in a statement, following the committee vote. "Now that Congress and the public are learning how credit card fees are driving up the price of gas, food and other necessities, the big credit card companies are in for a very rough ride."
NACS and other MPC member groups poured millions of dollars into public campaigns discrediting interchange (including newspaper, radio and Internet advertisements) and generating national and regional news coverage of the topic.
"Credit card fees eat up gas station profits," stated a headline published in the July 7, 2008, edition of USA Today. A few days later, and just a week before the Judiciary Committee vote, the MPC issued results of a survey it commissioned, which indicated that three out of four likely voters, across party lines, supported the bill.
"[P]ublic sentiment that something needs to be done about the credit card industry is at an all-time high," the MPC summarized. "Concerns about credit card industry fees, policies and practices touch hot buttons across party lines: Identical 51 percent majorities of Republicans and Democrats alike say they strongly support passage of the Credit Card Fair Fee Act."
Card brands respond
During the run up to the vote, Visa stated it was reducing interchange rates on gasoline purchases, but merchant groups complained it was too little too late.
MasterCard, meanwhile, wrote lawmakers urging them "to consider the many credible organizations and regulatory bodies that have voiced significant concerns about this legislation." Among them: the Department of Justice, the Federal Trade Commission, the Southern Christian Leadership Conference and Nordstrom Inc.
Nordstrom Executive Vice President Kevin Knight was quoted in a MasterCard press release, insisting that interchange represents "a fair price for the services we receive," adding that "we prefer market competition to regulation."
I'm sorry, but I don't see typical American voters being swayed by Nordstrom's opinion, especially those who may have friends or relatives struggling to keep their small businesses afloat.
This is an election year, folks. Millions of Americans are hurting financially, and lawmakers are going to try to do anything they can to ease that pain. Voting for legislation like the Credit Card Fair Fee Act (regardless of whether the bill ever gets signed into law this year) is tangible evidence of their concern, and a potential vote getter.
Choose a path
I suspect many folks in this business would agree that the interchange model hasn't held up over the long-term. In the early days, interchange was intended to compensate card-issuing banks for the extension of credit each transaction represented. Brand-related costs, like network fees, were factored in, too, but accounted for just a fraction of the total.
For acquirers, interchange provided a base upon which they could build their profit structure. Each year, when Visa and MasterCard released new interchange rates, acquirers would re-price merchant fees.
But the business isn't that simple anymore. Acquiring has diversified, and the savvy ISO wants to be a full-service solutions provider. ISO product lineups include credit, debit and prepaid card products and services; check services; and funding solutions.
Meanwhile, new competitors continue to enter the market, providing merchants and consumers with payment options that further denigrate the traditional business model in acquiring. PayPal is an obvious example.
We're at a crossroads. If you think the Credit Card Fair Fee Act is misguided, take a stand now. Contact your representatives in Congress today and tell them what you think. (For an updated list of representatives and senators, see "2008 Legislation Update: What side of the law are you on?" GSQ, Vol. 11. No. 1, April 2008.) The business you save might just be your own.
Patti Murphy is Senior Editor of The Green Sheet and President of The Takoma Group. E-mail her at firstname.lastname@example.org.
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