The US payments industry may well
have dodged one legislative bullet, but the air around the Beltway
is thick with them these days. At least the latest developments
favour the industry.
No sooner did the industry breathe
a huge sigh of collective relief after House Financial Service
Committee chairman Barney Frank acknowledged that interchange
legislation is off the committee’s agenda for 2010, than it
received a bit of a surprise from a venerable member of the
Senator Arlen Specter, a Democrat
from Pennsylvania who famously changed parties last year and is
facing a serious primary threat back home, has indicated to
Pennsylvania banks that he will be introducing legislation that
seeks to limit interchange fees charged to merchants with each
swipe of a credit card.
The bill, which will mirror
legislation introduced in the House of Representatives by Rep.
Peter Welch, a Democrat from Vermont, will allow merchants to
effectively surcharge their customers who choose to pay using
debit, credit or charge.
Welch wants to prohibit payment
networks including MasterCard and Visa from setting higher
interchange for premium cards. Banks use interchange revenue to
help pay for rewards programmes, which have become more lucrative
as banks seek to retain affluent customers.
Merchants have lobbied furiously to
reduce the fees, which generated an estimated $48bn in 2008,
according to the National Retail Federation.
The fees, averaging about 2%, are
deducted at the point of sale.
The Electronic Payments Coalition
(EPC), which represents some 60 payment-industry companies
including San Francisco-based Visa and Purchase, New York-based
MasterCard, released a statement arguing that Welch’s bill would
“open up the door for bait-and- switch advertising schemes,
charging additional checkout fees at the register and
discrimination against certain cardholders”,
Specter’s bill was prompted by the
gridlock on the House side, not to mention the complete lack of
bipartisanship on the Senate side that resulted in Republican Frank
dismissing any chance of House-led interchange legislation this
Frank made the announcement during
the government affairs conference for the Credit Union National
Association. The delegates, who are part of a coalition fighting
against changes to interchange rates, responded with hearty
Last year, US lawmakers advanced
two bills to regulate interchange, including one that would require
banks to enter into collective-bargaining agreements with retailers
to set interchange rates.
Another would have enabled
merchants to introduce surcharges and allow them to opt not to
accept cards with high interchange rates, such as those tied to
rich rewards programmes.
Interchange legislation was
hampered at least in part by an inconclusive government report that
merchants had hoped would help prove its case for reform.
“If interchange fees for merchants
were lowered, consumers could benefit from lower prices for goods
and services, but proving such an effect is difficult, and
consumers may face higher costs for using their cards,” concluded a
November 2009 report from the General Accountability Office, the
research arm of Congress.
Last year, Congress mandated a
study of interchange as part of the Credit Card Accountability,
Responsibility and Disclosure Act.
The General Accountability Office
concluded in its report that interchange raises merchants’ costs
but that legislative proposals to regulate it so far were
The EPC said Frank’s announcement
was welcome news, and asserted that Congress has no place in what
is essentially an intra-business dispute.
The National Retail Federation
vowed to continue to carry the legislative fight forward, whether
this year or next.
Another payments-related debate
revolves around a provision of the new credit card reforms that
spawned a recent decision by the Office of the Comptroller of the
Currency to ban “no interest, no payment” programs that were
commonplace at US big-box retailers.
The new rules, also endorsed by the
Office of Thrift Supervision, went into effect in February.
The OCC argued that the monthly
minimum payment is a key tenet for keeping a sound and safe banking
system, providing discipline to maintain the loan; keeping the
creditor in ongoing contact with the borrower, and giving consumers
an opportunity to show they can live up to their obligation. In
addition, the loans, which typically defer payments from three to
12 months, could mask the performance of a troubled portfolio.
Big-box retailers howled in
protest, arguing the rules were issued outside of proper
rule-making procedure, and that 87% of customers paid off the loan
before the promotion expired.
Congress has now entered the fray,
with several representatives supporting the retailers’ arguments
that such financing is an important part of the US payments
“Consumers rely on this type of
financing, and we are concerned that taking it away may have a
negative impact on retailers by decreasing sales during these
uncertain economic times,” wrote Senator Kay Hagan, (Democrat,
North Carolina), in a 23 December 2009 letter to Comptroller of the
Currency John Dugan.
These programmes are financed by
the large banks that operate the line of credit, with the retailer
paying the interest on the loan before the end date of the
promotion. Banks make most of the money from the late fees on those
who do not pay in full after the promotion period ends.
It also has played huge role in
spurring the sales of big-ticket appliances, so manufacturers have
joined the fight as well. The National Association of
Manufacturers, the Association of Home Appliance Manufacturers and
the Consumer Electronics Association all have signed onto the
retailers’ campaign to kill the rule.
In the aftermath, stores have
reconfigured their promotions, sticking with the “no interest”
portion but requiring some regular payments.