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The Green Sheet Online Edition

August 11, 2008 • Issue 08:08:01

HR 5546, the downside

As supporters of HR 5546, the Credit Card Fair Fee Act, celebrated the House Judiciary Committee's passage of the bill, opponents, including Visa Inc., called the bill "anti-consumer" and issued a statement to point out its shortcomings.

In the statement, Josh Florum, General Counsel for Visa, said, "The markup of HR 5546 only raises more questions and concerns about an already bad bill." He also said if the bill becomes law, it would "mandate unnecessary regulatory intervention into a fiercely competitive industry that is benefiting consumers, merchants and financial institutions [FIs]."

He added that passage of HR 5546 would especially hurt small banks and credit unions, since the smaller FIs rely on interchange income to support other banking services.

Legalized collusion

The U.S. Department of Justice and the Federal Trade Commission stated this legislation would reduce competition and harm consumers. In a letter sent to Rep. Lamar Smith, R-Texas, both regulatory bodies noted the bill "raises serious constitutional concerns" related to long-standing antitrust laws.

"The legislation would essentially legalize collusion among the nation's largest and most profitable retailers at the expense of consumers, community banks and credit unions," Florum said. "The retail federation wants all of the benefits of the payments system - guaranteed payment, convenience, risk management, reliability and increased sales volume - but wants to shift their cost of doing business onto the backs of consumers."

Dilemma down under

Smith cited Australia as an example of a country that adopted a similar regulatory approach. He said retailers' fees went down, profits went back into retailers' pockets, and "consumers were harmed through less choice, higher prices, fewer rewards and benefits, as well as checkout fees imposed by retailers at the checkout counter."

Ross Federgreen, founder of CSRSI, the Payment Advisors, and a member of The Green Sheet's advisory board, agrees that consumer costs will rise with HR 5546's passage, but that other, more significant factors are involved. The regulatory proposals on Capitol Hill address issues that are much more complex than what lawmakers are conveying to the retailers and the buying public.

"You look at the Australian experience, and, yes, the interchange went down, and consumer costs went up, and Visa is saying that the same thing is going to happen here," Federgreen said. He said he has no evidence indicating it won't happen here, and it is certainly reasonable to suggest it might. "I mean, [interchange] is squeezed down so much, there's got to be profitability in there someplace."

Federgreen feels Australia's interchange regulation set "government thresholds and a whole series of rules ... that cause costs to go down for the retailer, but the banks then passed [those additional costs] to the consumer side, and the banks' profitability actually went up."

Florum said Visa's position is that the government's intervention in such a manner creates an inherently anti-consumer and pro-retailer system. "Consumerism is a general topic - a crowd pleaser," Federgreen said. "In today's environment anything [the government] says that consumers believe will help them at the end of the day is going to carry a lot of weight."

A false god

However, Federgreen believes interchange is not the real culprit. "I think that interchange is a false god ... the real issue is downgrades and fees," he said. Downgrades are applied to transactions that do not qualify at the interchange level at which merchants submit them for processing; merchants pay a premium for those transactions.

"That's where the real costs are. Adding to that is the uncontrolled way that the system is managed on the merchants' side," he added.

It's not too late to get involved. HR 5546 heads next to the floor of the U.S. House of Representatives for a vote to determine if it will pass to the president's desk, where it may be signed into law. A date for the vote has not yet been set. end of article

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