California Apparel News

Consumers recently got some financial relief when Congress passed a bill making it illegal for credit card companies to raise interest rates arbitrarily on monthly balances. And now, some politicians think retailers should get a break, too.

The Credit Card Act of 2009, also known as the Credit Card Accountability, Responsibility and Disclosure Act of 2009, went into effect this month for millions of consumers.

Last month, California Assemblyman Pedro Nava (D–Santa Barbara) held an informational hearing in Sacramento on the interchange fees credit card companies charge retailers.

Interchange fees are imposed on merchants every time a customer uses a credit card. The cost of these fees ranges from 1 percent to 3 percent of the total purchase price, meaning that retailers pay credit card companies $1 to $3 on every $100 purchased. This may seem like a small fee, but it adds up when you think that retailers such as Macy’s Inc. took in nearly $25 billion in sales in fiscal 2009.

According to a November report from the U.S. Government Accountability Office, interchange fees netted credit card companies $45 billion in 2007. The 64-page report took the figure from an estimate from economists at the Federal Reserve. According to the report, credit card companies would not divulge their full earnings from interchange fees.

Nava’s hearing is part of an increasing wave of attention politicians in Sacramento and Washington, D.C., have paid to interchange fees. Nava hopes his hearing will influence the powers that be in Washington, D.C., where the regulators of interchange fees are based.

“I was struck by how helpless small-business owners feel in their ability to engage in negotiations with interchange,” said Nava, who is chair of the Assembly’s Banking and Finance Committee. He also is a candidate for California attorney general.

Nava heard testimony from the U.S. Government Accountability Office, which released a report in November on interchange fees, as well as from the National Retail Federation, the Washington, D.C.–based retail trade group, and Small Business California, a non-partisan advocacy group. The Electronics Payment Coalition, a credit card industry advocacy group, also attended the meeting.

Retail advocates complained that interchange fees are rising and credit card companies frequently do not make it clear how they decide how big these fees will be.

Retailers and their advocates also complained that they are not able to effectively negotiate their interchange fees with powerful credit card companies. Credit card companies frequently control negotiations because consumers increasingly favor using credit cards. Since 2005, more than half of annual retail transactions are made by credit and debit cards, according to the GAO.

Another concern is the lack of competition among businesses that issue credit cards. In 2008, Visa and Mastercard controlled 71 percent of the volume for the U.S. credit card industry, according to the GAO.

Retailer advocates said high interchange fees hurt consumers, too, who have those fees passed on to them, according to testimony at Nava’s hearing.

“We do not debate that credit card companies provide a great service,” said Scott Hauge, president of Small Business California. “But credit cards are becoming a problem.”

Some retailers complain they are losing money on transactions because interchange fees are increasing. According to the November GAO report, interchange fees on Visa and Mastercard premium cards have increased 24 percent since 2005. Premium cards are more costly to support because their promotions, such as frequent-flyer miles, are expensive. Fees on basic cards have not changed much in the past few years.

Finding out how fees are devised has become increasingly complex and confusing, according to the GAO report. In 1991, Visa and Mastercard carried four standard domestic interchange-fee-rate categories. However, by 2009, Visa had 60 categories, and Mastercard had 243.

Credit card representatives contended that fee categories increased because the number of businesses accepting cards for payment, ranging from taxi cabs to groceries and government agencies, has skyrocketed. A statement from Visa said interchange fees are crucial because they make the credit card system work.

Without credit cards, many consumers would not be able to patronize retailers, the GAO report said. Retailers benefit from the credit card industry, which insures speedy, guaranteed payments, that other systems, such as checks, cannot. Interchange fees fuel the system and provide funds to innovate services and attract more consumers.

Over the past year, several congressmen have introduced bills to regulate interchange fees. In May, Rep. Peter Welch (D–Vt.) and Rep. Bill Shuster (R–Pa.) introduced the Credit Card Interchange Fees Act (H.R. 2382), which would demand that the Federal Reserve and the Federal Trade Commission put together new rules to ensure greater transparency in how interchange fees are formed.

In June, Rep. John Conyers (D–Mich.) and Shuster reintroduced the Credit Card Fair Fee Act (H.R. 2695), which gives retailers antitrust protection to organize and negotiate with credit card companies on interchange fees.

Also in June, Sen. Richard Durbin (D–Ill.) introduced Credit Card Fair Fee Act (S. 1212), which is similar to Conyers’ and Shuster’s bills. But it also calls for a three-judge arbitration panel to rule on interchange fees if retailers and credit card companies cannot reach an agreement.

Since H.R. 2382 was introduced, it was discussed in October in the Committee on Financial Services. H.R. 2695 and S. 1212 were respectively referred to the House Judiciary Committee and Senate Judiciary Committee, and no further action has been taken.

The National Retail Federation and the Retail Industry Leaders Association have actively lobbied for the passage of these bills. RILA also has been lobbying Congress to put into law other measures benefitting retailers, said John Emling, RILA’s senior vice president of government affairs.

RILA believes that debit cards and checks should have parity with interchange fees because both transactions are taken directly out of a consumer’s checking account. Interchange fees for debit cards typically are higher than for checks.

Emling said if some retailers can negotiate interchange fees, then smaller retailers should not have to pay higher fees than bigger retailers.

In a statement, Visa criticized Washington legislation for introducing regulation that would be awkward and eventually result in credit card companies tightening credit and providing fewer services.

One credit card industry analyst, who requested anonymity, said legislation reforming the credit card industry’s relationship with retailers was doomed. Interchange fees finance premium cards’ rewards programs, and they are highly popular with consumers. No politician is going to demand these popular programs be curtailed in any way, he said.

Nava, the California assemblyman, said government action could help find a solution to this market problem. “It is difficult to corral the banking, financial and credit card industries,” he said. “They are powerful and have major influence. But that does not mean you should stop trying. Through public pressure, you should end up with a better result.”