GAO Releases Study on US Card Interchange Fees
The US Government Accountability Office (GAO) has just released a report on interchange fees on payment cards in the US. The report, titled "Credit Cards - Rising Interchange Fees Have Increased Costs for Merchants, but Options for Reducing Fees Pose Challenges", is available for download on the GAO's website.
Proposals for reducing interchange fees in the United States or other countries have included (1) setting or limiting interchange fees, (2) requiring their disclosure to consumers, (3) prohibiting card networks from imposing rules on merchants that limit their ability to steer customers away from higher-cost cards, and (4) granting antitrust waivers to allow merchants and issuers to voluntarily negotiate rates. If these measures were adopted here, merchants would benefit from lower interchange fees. Consumers would also benefit if merchants reduced prices for goods and services, but identifying such savings would be difficult. Consumers also might face higher card use costs if issuers raised other fees or interest rates to compensate for lost interchange fee income. Each of these options also presents challenges for implementation, such as determining at which rate to set, providing more information to consumers, or addressing the interests of both large and small issuers and merchants in bargaining efforts.
The title of today’s GAO report said it all: “…Options for Reducing Fees Pose Challenges.” Overall, the report presented a fairly comprehensive assessment of small and large stakeholders throughout the payment food chain. Although the GAO identified a number of problems in the current system, it always seemed to balance the merchant ire with the banks and network perspective. Despite their efforts to spin select points after the report’s release, the merchant coalition was certainly hoping for a stronger indictment of the current system. They didn’t get it. Independent observers who were hoping for clarity on a path forward were also disappointed.
The report itself was fundamentally light on a couple of levels. Although section 501 of the CARD Act required the GAO to review “other jurisdictions where the central bank has regulated interchange fees”, the report was surprisingly weak on the benchmarks from anywhere other than Australia (with its 50 bps rate). They could easily have found the following rates on MasterCard’s European website: UK (100 bps), France (50-80 bps) or inter-country Europe (20-30 bps). While other countries (such as Canada and Mexico) have blended rates comparable to the U.S., the GAO would have a hard time finding rates higher than the U.S. in other industrialized countries. A low-effort benchmarking analysis would have benefited the merchant viewpoint.
The report also had very limited coverage of Discover and American Express. Both companies should be cheering – being ignored in a government watchdog report is a blessing.
The GAO’s assessment of four alternatives for reforming the current system identified numerous implementation challenges – and a likelihood of unintended consequences. If anything, the report seemed biased toward interchange caps and loosening restrictions on network rules (such as honor all cards and surcharging). It was decidedly negative on allowing merchants and issuers to directly negotiate fees.
Such sentiment will further reduce the waning momentum of the Conyers bill. Most rational economists and industry observers had viewed direct issuer-merchant negotiations as unworkable and filled with bad externalities for small merchants. The GAO report will help legislators to move beyond the poorly-crafted Conyers proposal and focus future congressional efforts on rates and rules approaches that have been trialed in other countries.
But congressional efforts are just one element of a multi-factor storm that is making major interchange reform likely. The DOJ’s investigation into Visa and MasterCard rules, the continued progression of the class action merchant litigation, and the activity in Congress are feeding off each other. The worst fear of the banks and networks is a double (or triple) whammy: Congress reduces rates dramatically; the DOJ requires major rules changes; and they lose in court with an astronomical treble damages bill and a further reduction in rates. The desire to avoid such a nightmare scenario – and find a negotiated settlement – make it increasingly likely that interchange rates will fall in coming years. Not a given, not something I favor – just reasonably likely.
Overall, the GAO report didn’t accelerate the likelihood of major interchange reductions. If anything, it created some breathing room. However, the combination of future legislation, ongoing litigation, regulatory investigations and competitive developments make major interchange reductions increasingly probable in the next couple years. Unfortunately, that may be too distant a horizon for an industry already focusing on the imminent challenges of CARD Act implementation, regulatory scrutiny and a bad economy.
Posted by: Peter Donat | November 19, 2009 at 11:59 PM