Merchants press Congress to lower fees on credit cards

Rep. Louie Gohmert (R-Texas) says he’s “a free-market guy” who believes that the market should be left to “make its own determination” on price.

But when it comes to a bitter feud between banks and merchants over the credit card payment system, he is backing a solution that is anything but laissez-faire.

{mosads}After getting an earful from grocery and convenience store owners in his East Texas district about the so-called interchange fees they pay to banks, Gohmert wants Congress to force the banks to negotiate with merchants on a lower rate.

“Now the banks are mad,” he said. “I’ve sided with them before, and this time I don’t think what’s going on with interchange fees is fair. When you see that [merchants] are not able to negotiate a better fee, you see market forces aren’t working.”

An outcry from small-business owners in their districts has persuaded 16 Republicans to support legislation sponsored by the liberal chairman of the Judiciary Committee, Rep. John Conyers Jr. (D-Mich.), to rein in interchange fees.

Lobbyists for the banking industry have decried the legislation as a price-control bill. But in this case, even some Republicans have set aside their qualms about heavy-handed regulation, citing a torrent of complaints from people who pump their gas or sell them groceries back home.

The cries of such constituents have so far trumped the pleas of banking lobbyists, a group with whom Republican supporters of the bill have often sided.

“Normally, I’m not a strong one on regulatory solutions. But in this case, the need for relief is clear,” Rep. Phil English (R-Pa.) said.

An important source of revenue for many banks, interchange fees are a bane to merchants. Set by Visa and MasterCard, the fees are paid to card issuers via the merchant’s bank whenever a customer uses plastic at a store. The rates vary across segments of the retail industry, but on average, they amount to 1.75 percent of purchase price, the card associations say.

Lobbyists for retailers argue that the fees are higher in practice — approximately 2 percent of the purchase price — once the growing use of rewards cards, which often carry higher fees, is taken into account. They argue that Visa and MasterCard — which have a combined 80 percent share of the credit card industry — use their market power to push up the interchange rates.

All told, interchange fees paid by merchants ballooned from $16 billion in 2001 to $42 billion in 2007.

People in the grocery and convenience store industries, where profit margins are razor-thin, are yelling the loudest.

Unable to negotiate lower costs from their gasoline suppliers, owners of convenience stores don’t see any financial benefit from the soaring prices at the pump, said Chris Tampio, the senior director for government relations at the National Association of Convenience Stores (NACS).

But $4-per-gallon gas has meant that more drivers have to rely on credit cards to fill their tanks. As a result, convenience stores have seen their interchange costs jump. Last year, the industry made $3.4 billion in profit after paying $7.6 billon in interchange fees, Tampio said. That’s compared with the $4.8 billion in profits and $6.6 billion in interchange fees they paid in 2006.

Conyers’s bill, which he introduced with Rep. Chris Cannon (R-Utah), would allow merchants to band together to negotiate with banks on interchange fees and terms, exempting both parties from antitrust laws. If they fail to reach agreement, a three-judge panel would decide between each side’s best offer.

At the request of Rep. Lamar Smith (R-Texas), the Judiciary Committee’s ranking member, officials at the Justice Department and the Federal Trade Commission (FTC) reviewed the bill. In separate letters to Smith this week, FTC Chairman William Kovacic and Keith B. Nelson, a Justice official, raised concerns about the legislation. Nelson wrote that it could harm consumers rather than help them.

Banking industry lobbyists predict the language on the three-judge panel will be stripped out at markup, which could happen next month. Yet they would still vigorously oppose the bill, and they acknowledge that removing such language would only make the legislation easier to pass.

Last week, Sen. Kit Bond (R-Mo.) became a co-sponsor of a companion bill introduced by Sen. Dick Durbin (D-Ill.). In a statement from his office, Bond said he had heard from retailers throughout Missouri, adding, “It troubles me that small businesses feel powerless in negotiating interchange fees.”

Banking lobbyists admit that they underestimated the merchants’ lobbying muscle and have been forced to play catch-up. But they also accuse their opponents of misrepresenting the issue.

“It’s been difficult, and mainly it’s been difficult because the merchants have clouded the facts. I don’t think I’ve ever seen Republicans and Democrats in a bipartisan way really ignore the facts in a bill like this,” said Peter Madigan, a lobbyist who has been hired by the Electronic Payments Coalition , which represents the banks.

“We are having to refute four or five factual misstatements before we start to make our case,” said Jason Kratovil, a lobbyist for the Independent Community Bankers of America , a coalition member.

For example, he said that members are hearing from merchants that Visa and MasterCard forbid them from offering discounts to customers paying in cash.

Jeff Lenard, a spokesman for NACS, denied this. “We’ve not said we can’t offer cash discounts. We say [the credit card companies] are very prescriptive on how we can do it.” He asserted that the credit card companies tell merchants they can do it, “and then turn around and do everything possible to make it difficult.”

The two sides also disagree about the average interchange rate charged to convenience stores. Madigan said it is lower than in other industries — 1.2 percent — while Tampio said that it is significantly higher.
The nasty lobbying fight puts many Republicans in a tough spot, forcing them to choose between two loyal constituencies. For many, the pleas of small-business owners in their districts, struggling from the weakening economy, hold more sway than K Street lobbyists.

“People are hurting. I see them every weekend when I go home. I do the grocery shopping. I see these people,” said Rep. Walter Jones (R-N.C.), a member of the Financial Services Committee who is also supporting a bill to rein in practices in the credit card industry that affect consumers.

To counter the arguments of the mom-and-pop business owners, the Electronic Payments Coalition has pushed its smaller members — community banks and credit unions — to the fore in recent months. Also, the Financial Services Roundtable organized member meetings with 20 credit card executives on the Hill last week.

A lobbyist for the group, Scott Talbott, said they were able to “correct some misinformation” on the issue.

“We had a number of ‘ah-ha’ moments with members who are currently supporting the bill,” he said.

However, some lawmakers are unlikely to budge. “I’ve been to a lot of [Financial Services] hearings. I think the banks make a great deal of money. I’m happy that they’re succeeding,” Jones said. “I think the fees and penalties they are charging are just too high.”