By Brian Kilcourse, Managing Partner
5/20/2008
Last week, a U.S. House of Representatives Judiciary Committee anti-trust task force took up proposed legislation (H.R. 5546) that is intended to force Visa and MasterCard to directly negotiate the “interchange fee” with retailers for each online credit card transaction. According to the proposed legislation, if such negotiations fail, a panel of three administrative law judges in the Justice Department would set the rates. This is the latest move by lawmakers to put more controls on the credit-card industries. Visa (of course) says the bill is anti-competitive.
In his opening statement on May 15, Committee Chairman John Conyers said, “Last year, when I chaired a hearing on the topic of credit card interchange fees, I was taken aback by the depth of the problem facing merchants. Members on both sides of the aisle were equally concerned about these fees and the effects they ultimately have on consumers. After some deliberation, I, along with my colleague Chris Cannon, introduced the ‘Credit Card Fair Fee Act of 2008.’ We believe this legislation will go a long way toward restoring some measure of balance between retailers and the credit card companies… Critics of the legislation claim that it sets "price controls," but nothing could be further from the truth. Encouraging two parties to voluntarily negotiate is not regulation. The aim of the bill is to simply give retailers a seat at the table that they currently do not have. Currently, the retailers are forced to enter take-it-or-leave-it contracts before they can accept Visa and MasterCard at their stores.”
Retailers are very familiar when it comes to “take it or leave it” proposals from the big bank card processors. For example, it’s hard to find a retailer that is happy with the costs associated with PCI DSS compliance mandates from the processors (and as we apparently found out with the Hannaford breach, “PCI compliant” doesn’t necessarily mean “secure”). Even though we at RSR have suggested that the retail industry really needed a kick in the pants to secure all customer specific data, the heavy handed treatment by the “mandaters” hasn’t made any friends.
Whether or not Visa and Mastercard act unfairly has been challenged in courts several times. The U.S. Department of Justice took on the companies in 2000, calling them a “cartel.” In a famous class action lawsuit brought against the two companies by Wal-Mart and other retailers in 1998, a lawyer for the plaintiffs said, "this is essentially a battle for the control of the American payment system" (Visa and Mastercard eventually agreed to a $3B settlement). Even American Express (no favorite of retailers itself because of its high fees) sued the two companies, which represent over 75% of the credit volume in the U.S., after a New York court ruled that they had prevented banks from offering Amex credit cards to their customers.
As for credit card fees, they cost the retailer about 2 percent of each transaction, which is paid by the retailer to the cardholder’s bank. The fee makes up most of “merchant discount fee” retailers pay. These fees added up to $25 billion in revenue in 2007 for VISA. Netting it out, this is really big business. Considering that many retailers’ pre-tax earnings are in the 3-5% range, it’s easy to see why the fees are such an irritant.
We have to ask, what took so long for Congress to act? After all, credit card payment systems are over 30 years old now. We’re supposedly entering a new age of secure debit-based and stored-value systems that will render credit cards obsolete (once consumers adopt the new alternatives, which could accelerate given the outrageous interest rates that banks charge consumers). For example, wireless payment capabilities using mobile technologies with near-field communications are coming on strong. Upstarts such as Paypal can bypass the credit card processing networks altogether. Change is in the air… but it would be ludicrous to assume that Visa and Mastercard will merely wave goodbye to all that revenue.
Just as the Internet triggered a consumer revolt against the notion of “the average consumer,” new payment systems could trigger a retailer revolt against traditional card based payment systems. People – and companies – like alternatives. The big card processors take it too for granted that retailers are so disaggregated and so averse to anything “new” at the checkstand that they don’t need to worry. For their part, retailers need to focus on the payment systems of the future, because now is their chance to change the rules of engagement.
What do you think?
|
