ust when you thought the battle over interchange may be over, along comes another blow to these schemes. This time around, it's the Reserve Bank of Australia that wants to rein in Visa's debit card activities.

The Reserve Bank, Australia's central bank, is taking issue with interchange on Visa debit cards, as well as the Association's 'honor-all-cards' rule. It also has issues with the appearance of Visa debit cards-merchants should be able to visually distinguish debit from credit cards, the regulator insists-and Visa prohibitions on merchant surcharging.

This isn't Visa's first run-in with Aussie regulators. A few years back, both Visa and its rival MasterCard tussled with the Reserve Bank over the regulator's decision that both companies' credit card operations were subject to its regulation, the same as other financial enterprises ("Not Going To Be a G'Day For Credit Cards Down Under," The Green Sheet, May 27, 2002, issue 02:05:02.)

In the end, both Visa and MasterCard were forced to open up participation in their respective card programs, slash interchange fees and eliminate rules against merchant surcharging. (MasterCard doesn't operate a debit program in Australia, so it's not involved in this latest regulatory skirmish.)

Doesn't this all sound familiar?

MasterCard, Visa, and all retail payments networks for that matter, are under attack from regulators and anti-trust lawyers worldwide. In addition to Australia, actions are being contemplated or already have been filed against one or both of the credit card giants in the United States, the United Kingdom and the European Union (EU).

Meanwhile, the U.S. Department of Justice (DOJ) has let it be known that it's looking closely at mergers involving payments networks, as evidenced by its reaction to the acquisition of Concord EFS, Inc. (a large debit/credit card acquirer) by First Data Corp. The deal went through, but only after First Data agreed to divest its debit card network, NYCE.

When the dust settles from these worldwide offensives, you can be sure revenue streams flowing from merchants to acquirers will be significantly diminished. A new model for acquiring revenues may even emerge.

It's not a stretch. Interchange fees, by their nature, are tough to justify in a free market economy, since it has many of the markings of collective price setting.

The Many Dimensions of Anti-trust Law

Anti-trust law is serious business. It's not just about market size, competition or pricing. These laws have a lot to do with politics: the politics of blame; the politics of economics, the politics of survival.

If the small guys can't compete, they can't survive financially, and that's not good economics.

Economies everywhere are struggling today. If you need any more evidence than your list of friends or acquaintances who are now out of work, consider this factoid: U.S. consumer confidence dropped six points in February 2004, according to the Conference Board. Similar drops in confidence have been reported elsewhere around the world, too, including Australia.

Consumer confidence-which in this market includes small business confidence-is the juice that keeps economic engines running. When governments can't magically improve economic conditions, perceptions can take on significant importance. There's a perception that, I suspect, when economic times get tough, consumers can be mollified by government actions against a few big businesses that are perceived as not playing fair.

Remember the break up of AT&T in the early 1980s, when unemployment was high and so was inflation? The break up was portrayed as being good for consumers. Are current economic conditions prompting regulators and anti-trust lawyers to look at POS interchange pricing similarly? Possibly.

Payment Cards in Perspective

Payment cards certainly are big business-credit cards as well as debit.

In January 2004, Visa reported a huge spike in Interlink PIN debit card activity; compared to January 2003, there was a 39% increase in transactions and a 43% rise in dollar volumes. Visa, which has been promoting Interlink heavily during the last 12 months or so, says it saw $3.3 billion in Interlink online (PIN) debit card traffic in January 2004.

With more than $1 trillion a year in U.S. sales alone, Visa already has a huge market in credit card, and offline (signature) debit card transactions. Add MasterCard's totals-15 billion credit card transactions worth $1.27 trillion, worldwide last year-and you're talking $50 million, at a minimum, in interchange fees paid by retailers for transactions involving these two card brands alone. (This is a rough calculation based on base interchange rates.)

Retailers say they have no choice but to pass along interchange costs to their customers. It's become their battle cry to lawmakers and regulators, in fact. The Reserve Bank of Australia said it took on Visa and MasterCard because of complaints it received from consumers and small retailers.

The EU says pressure from retailers prompted it to attack Visa and MasterCard on pricing. The European Commission (EC), the EU's competition watchdog, ordered Visa to slash cross-border interchange in 2002; last year the EC initiated similar action against MasterCard. Meanwhile, the UK's Office of Fair Trading has described card interchange as a "tax on retail transactions" and has vowed to take action in order to curtail the fees.

Lessons Learned

Retailers are a large constituency in the U.S. market, especially small independents. And recently, a contingent of independent grocers asked the Federal Trade Commission (FTC) to look into Visa's interchange practices, in particular any special pricing arrangements it may have with large, national retailers.

Under the settlements announced last year between Visa, MasterCard and nearly every retailer in the country, the card associations were required to re-price debit interchange beginning in January 2004. Another result of the settlements was that several large retailers (among them, Wal-Mart) got to renegotiate debit card rates, securing sweetheart deals that, according to reports, dramatically undercut published prices.

The National Grocers Association (NGA), a trade group representing independent grocers, brought up the issue last month at a hearing on mergers and competition conducted by the FTC and DOJ lawyers.

Contending that there was "no evidence that Visa's favored retailers" were passing on lower debit interchange costs to consumers, the NGA urged federal anti-trust lawyers to investigate the situation and "take appropriate remedial action."

With all these forces coming down on interchange, it may be a good time for Visa, MasterCard, and all payment networks for that matter, to seriously examine interchange strategies. The original concept behind interchange was to compensate card issuers for the risks associated with extending credit. But that hasn't been the case in a number of years-certainly not since Visa and MasterCard began "incentive pricing" to push retailers toward electronic authorization. If interchange is about making money-and I don't believe anyone would dispute this assertion-then let's be frank about it.

And let's not lose sight of the fact that in a free market, the marketplace should dictate prices-not just the sellers, or, for that matter, the buyers.

Patti Murphy is Contributing Editor of The Green Sheet and President of The Takoma Group. She can be reached at patti@greensheet.com