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GS Advisory Board:
Discussion on Interchange

In a May 2005 press release, the Merchants Payments Coalition (MPC) applauded the Federal Reserve Bank of Kansas City for holding a recent conference on credit and debit card interchange fees.

The MPC, made up of groups including the National Retail Federation (NRF) and Food Marketing Institute, represents merchants who accept credit and debit cards for payment. MPC supports the argument that rapidly escalating interchange fees amount to a hidden tax on U.S. consumers and drive up the cost of goods and services.

"The Federal Reserve needs to question whether the growing use of cards rather than cash and checks (especially high-interchange debit cards) undermines the Fed's ability to measure and manage the nation's money supply," MPC Chairman and NRF Senior Vice President and General Counsel Mallory Duncan said in a statement. "We welcome the fact that the Federal Reserve is concerned enough to hold a conference focusing on this issue and hope that this is a sign of action to follow."

We asked members of The Green Sheet Advisory Board for their comments on this subject. Their responses, listed in alphabetical order, follow:

Adam Atlas, Attorney at Law

"On the subject of interchange fees being a tax on U.S. consumers, one of the considerations used is that there does not appear to be a full disclosure from the bank Associations as to a correlation between interchange fees and costs associated with them. ... We don't know how much profit banks are making in providing acquiring services to merchants. ... As participants in the acquiring industry, we have to be careful in criticizing the very source of our income.

"I believe that greater disclosure of the actual cost of providing merchant account services would be beneficial not only to consumers but to promoters of those services such as ISOs and acquiring banks. My general understanding of bank Associations is that they are not-for-profit organizations. ... They pass through costs and profits to their member banks. As such, there is ample opportunity to monitor the precise costs and profits associated with the services and disclose such information to the general public as well as [to] participants in the industry.

"In a worst-case scenario, this kind of disclosure could eventually be mandated by the government if [it] decides that electronic payments are the basis of the majority of payments in America. The general public will be within its rights to demand a bare minimum of costs associated with electronic payments as such forms of payment become the norm. Otherwise, there would be a kind of necessary impediment to carrying on ordinary business.

"The whole purpose of freely tradable currency is to avoid the levying of fees for the mere fact of spending money. If it always costs a certain percentage of your dollar to spend the dollar, then there arises a question of whether the currency is truly serving its intended purpose.

"Even if the general public advocates for greater scrutiny of electronic payments businesses, the existing system, whereby intermediaries such as ISOs, processors and acquiring banks earn commissions for handling the funds of merchants, will not change quickly. The banks and the merchants are too heavily invested in the existing system for there to be a dramatic change in the way things work."

Clinton Baller, PayNet Merchant Services Inc.

"Reasonable discussion of these issues is warranted. Bringing incendiary rhetoric to the discussion is neither reasonable nor productive. Several of the statements from the MPC and its members and representatives do absolutely nothing to further intelligent discussion and understanding. They are inflammatory and ill-informed.

"It is interesting that the same merchants who lauded the decision to allow MasterCard and Visa issuing banks to also issue American Express [AmEx] are now lamenting interchange increases, which are in no small measure a competitive response to the higher fees that AmEx is promising to banks that issue its cards. I guess enhancing competition doesn't always result in lower prices. Here's one ... solution for the retailers who don't like the fees: Stop taking cards."

Robert Carr, Heartland Payment Systems Inc.

"Merchants want lower costs. Everybody wants lower costs, but let's have some intellectual honesty about this. AmEx won the right in court to allow banks to issue AmEx cards. Consumers like AmEx cards because of the superior rewards programs. So, to be competitive, Visa and MasterCard are encouraging banks to issue rewards cards, which cost more. Visa and MasterCard are doing their best to overcome the competition of AmEx. AmEx isn't getting sued over their higher rates, and I don't hear too many lawyers talking about their higher rates either.

"Why aren't merchants complaining about AmEx's and Diner's Club's rates, which are a lot higher than Visa and MasterCard's? It is difficult to find an argument against Visa/MasterCard on this topic from any party that has credibility relative to the closed-loop systems of AmEx and Discover. ... What do AmEx and the Department of Justice expect Visa and MasterCard to do? They are going to compete, and that is in the best long-term interests of consumers, merchants, ISOs and acquirers alike."

W. Ross Federgreen, CSRSI

"The issues involved are deep and complex and are not served by simplification. At its core, merchant services is a multi-sided market platform and responds to these economics. ... I believe ... that competitive forces, specifically AmEx, are now driving some of the most recent interchange increases. The fact is that an issuing institution can make more money by issuing an AmEx product than a MasterCard/Visa product.

"For MasterCard/Visa to stay competitive, they must raise interchange. Remember that the Board of Directors of both MasterCard and Visa are made up of 'member banks' in the majority. The statement that the growing fees will in some manner affect the Fed's ability to manage the money supply is sheer nonsense. ... When one considers this topic, merchant services fees have never been calculated as part of money supply management. Is this a hidden tax on consumers?

"This is the same as saying that advertising, marketing, packaging, supply chain logistics, the booming Chinese economy, [and] the cost of commodities are hidden taxes on consumers. All of these factors are calculated into the cost of goods. Remember, merchant services are a service! "If a consumer does not wish to purchase, they simply will not. In the case of a product [that] is necessary, such as energy, regulation is in place. In the example of purchasing food, lower interchange levels are in place. From the international perspective, it is true that both the Australian and British governments have successfully legislated reduction in merchant service costs by regulation.

"If that is what we want here, I think a direct fall-out will be the end of the ISO/MLS industry as we know it. Why would anyone need resellers for a fully commoditized and regulated service? ... Where would the sales commission and expense come from? Payment card cost needs to be truly understood by merchants and therefore de facto controlled. The mechanism for doing this has to be to enable merchants to truly have a referenced neutral unbiased understanding of where they stand."

Alan Gitles, Landmark Merchant Solutions

"I don't agree with the premise of the press release. Merchants may not like paying interchange, but view it as the cost of convenience. No one disputes that credit card acceptance reduces costs imposed by handling cash and checks and increases sales. It is simple. If a cardholder pays off their balance monthly and uses it as a charge card, then what incentive would there be for a bank to issue it to these cardholders in the first place? Case closed."

Jared Isaacman, United Bank Card Inc.

"I think regulation to a certain degree would be greeted with a warm welcome by the merchants and acquirers alike. While it makes sense to immediately blame the acquirers and processors for all the interchange increases and rate increases, the blame really falls on the issuers.

They receive the bulk of the fees charged to a merchant for accepting credit cards and also have the majority influence on the increase of those fees. The acquirers, ISOs and MLSs of the industry want to make a reasonable residual off each transaction based on the risk of the account and the level of service being provided.

"If this can be maintained through regulation, then the complaints would probably only come from the issuing side. The merchants would be happy with regulation as it will minimize the fluctuation in their credit card processing fees. The acquirers will be happy as all the attrition and customer service complaints from the constant rate increases and new interchange categories would hopefully be minimized. So, ultimately, it comes down to the issuers, and I anticipate their argument already being that the interchange modifications and increases are necessary to remain competitive with organizations like AmEx."

Lazaros Kalemis, Alpha Card Services Inc.

"This call to action for the federal government to step in and control interchange fees is unbelievable. My first thoughts immediately go to the high prices of federally regulated items as the result of any government action. I also couple that with the new-found ability of issuers such as MBNA to freely issue AmEx-branded cards and receive over two times the interchange than what they commonly receive from the card Associations. I then ask, 'What are the Associations expected to do?' Lose market share to a company willing to pay the issuers more for their money?

"I have never heard of any business that willingly loses market share. The real question for the Fed should be 'Why do we Americans rely so much on credit rather than what we have in our pockets to spend?' They expect Americans to use the money of the issuers to help the economy grow, but they want to limit the profits of these same companies.

"Where is the incentive? How many of us would be in business today if someone told us we could only make 'X' amount of profit no matter what? I think the Fed would be better served on working on ways to eliminate the deficit rather than changing the foundation of our capitalistic society and limit any business from making the most profit possible.

If the American people were not becoming more and more dependent on credit cards to pursue the American dream, there would be no alleged hidden tax."

Mitch Lau, Money Tree Merchant Services

"I remember back in the 1980s when the 'Associations' began to offer lower rates for electronically delivered transactions. Since, at that time, most bankcard sales involved calling for an authorization and submitting paper drafts, the Associations offered special rates known as TIRF and AID to merchants who would deliver their drafts electronically via a credit card terminal. The 'T' in TIRF stood for temporary, and whenever concern over increasing discount rates was raised, the Associations would say, 'We told you the lower rates were only temporary.'

"Here we are in 2005, and the rates continue to increase. It could be said that the rates are low compared to 20 years ago, as many merchants paid up to a 6% discount rate. My question would be, 'Where does it stop?' When will the Associations stop playing games by confusing everyone with a multi-tiered pricing structure that would cause even Einstein to scratch his head?

"And let's get real. Why call it a discount rate? Who is receiving the discount? Normally I would say let the market take care of itself; however, since Visa and MasterCard have apparently used strong arm tactics in order to keep other card companies out of the game, it would seem to me that they opened themselves up to regulation.

"Having said all of this, let's not forget that the [MPC] is not exactly representing a group of non-profit companies. It is also worth mentioning the exorbitant interest rates being charged to consumers by the banks for credit card debt. Any guilt for stifling the economy can be placed at many levels."

Garry O'Neil, Electronic Exchange Systems

"Due to the complexities of fees and pricing within the competitive interchange markets, the rules of engagement involving the Federal Reserve must require flexibility and agility to tailor the specific principles and specific circumstances of the bankcard industry. Any federal review or intervention involving interchange fees must be addressed from a behavioral and structural assessment. "A behavioral assessment, for example, can be in the form of a pricing regulation, whereas a structural assessment attempts to modify the affects of a domineering market.

Therefore, the challenge for the Federal Reserve is to ensure that competition policies in the fee structure are not abusive and curbs the market power to prevent dominant growth and penalties to consumers and merchants."

Dave Siembieda, CrossCheck Inc.

"Payment choice and flexibility [have] always been important to consumers and, in fact, this is proven daily as consumers choose from, and even demand, a whole menu of payment methods at the point of sale.

While this may be convenient for consumers, merchants are now faced with paying fees on what at one time was a cash or check payment. For a business with a small margin of profit, these fees can truly impact the bottom line.

"With the increase of electronic transactions, especially micro payment debit, I expect we'll see an increase in instances of fees being directly passed on to the consumer or embedded within the purchase price."

Scott Wagner, GO Direct Merchant Services Inc.

"I'm pretty sure all would agree, this is a rather explosive topic. Since the subject matter involves MasterCard, Visa, the member banks, T&E type card companies, potentially the government and, of course, merchants, I'm going to leave the complicated responses and deep-seated opinions to those closer to the fire. "My two cents would come from a merchant's perspective, and it is needless to say the comments would be pretty obvious: This is crazy! Not only are fees getting completely out of hand, you have to be a rocket scientist or CPA or both to figure out your monthly statements, and that's not processor-specific, that's everyone. Seemingly, something's gotta give ..."

To view a copy of the MPC press release, visit:

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