The Credit Card Fair Fee Bill is Back

Having tackled the cardholder side of the credit card business last month by enacting the Credit Card Holders Bill of Rights, Congress has gone back to its other piece of unfinished card legislation, the Fair Fee Act. This bill deals with the fees that merchants pay to accept credit cards.

Last August, the House Judiciary Committee approved a version of this bill, but like the consumer-oriented bill of rights, the merchant-fee legislation got lost in the financial crisis shuffle. It is now front and certain again. Inexplicably to me, however, the new version, like last year's, advances the notion that credit card merchant fees can be controlled by giving merchants a "seat at the table" and putting a Department of Justice, Antitrust Division, lawyer there as well. I am quite skeptical about whether this approach would be successful. To be sure, merchants complain that inter-change fees are currently non-negotiable. They are presented to merchants by the Visa and MasterCard systems on a take it or leave it basis. Of course, merchants have always been free to "leave it," and the card systems have had to take that possibility into account in setting the fees. Giving the merchants a seat at the table will not change the dynamic. The merchants sole bargaining chip will remain the right to refuse to accept the card. But if card systems know now that merchants cannot say no, it is hard to image how merchants will be able to convince them otherwise just because they have a seat at the table.

The legislation does provide for antitrust immunity to both card issuers and merchants that negotiate collectively. It would thereby bless the long standing practice of issuers in the Visa and MasterCard systems of collectively imposing their merchant fees. For someone who believes as I do that the remedy for anticompetitive interchange fees is more competition, explicitly permitting collective fee setting seems like a very bad idea. And for the merchants' part, although collective negotiations might enable them to more credibly threaten not to accept a particular card brand, the legislation exempts group boycotts from the scope of the antitrust immunity. Would a group of merchants in a negotiation under the proposed act engage in an unlawful group boycott if they collectively threatened to stop accepting Visa? The legislation does not make this clear, but it is hard to see how such a collective threat would not constitute a boycott.

Another way in which the legislation might be thought to help merchants is that it mandates that all merchants participating in a negotiation are entitled to the same fee rate regardless of the merchant category in which the card system had previously placed those merchants. One might image a negotiation including Walmart and many smaller retailers in which the small retailers would end up with the same rate as Walmart. But what incentive would Walmart have to join such a negotiation? Walmart already has enough clout to force the card systems to give it a reduced fee, and that fee constitutes a competitive advantage over other retailers that Walmart would be loath to give up.

The legislation originally proposed by Congressman Conyers in the spring 2008 would have set up an interchange court to set fees if the merchant/card system negotiation reached an impasse. The fee court was stripped from the legislation passed by the House Committee last summer to attract sufficient votes for committee passage, and it has remained out of the House bill that Conyers introduced in early June.

Senator Durbin, however, has now introduced a new Senate Bill that brings back the idea of a fee court to set interchange fees when merchants and card systems fail to agree. The process would resemble an arbitration proceeding before a panel of judges appointed by antitrust enforcers at the DOJ and FTC. If the merchants and card systems could not reach agreement, a hearing would be held at which both sides could present evidence and argument about a fair fee level. The panel would then set the fee, which would remain fixed for three years.

One could reasonably oppose the fee court on at least two grounds. First, the court would have insufficient information and expertise to set appropriate fees, and second, it would likely be subject to undue influence by the regulated parties just like the rate setting bodies of old. But at least the threat of an imposed fee might lead the card systems to try to reach agreement with the merchants.

The bill is likely to face fierce lobbying opposition from card systems and issuers, large and small. Credit Union National Association Senior Vice President of Legislative Affairs John Magill summed up the issuers argument this way: "The merchants' effort to avoid paying their fair share of electronic transactions threatens the integrity of the payment processing system."

I continue to wonder why Congress does not simply require the largest card issuers to negotiate their own interchange fees. That is, force Citi, Chase, Capital One, and a few of the other large issuers to set their own fees. Merchants could then much more credibly threaten to drop a card, because they could single out one issuer as opposed to dropping out of Visa or MasterCard, entirely. To be sure, this approach would differentiate among issuers by allowing some to set fees collectively through Visa and MasterCard, while others would have to compete individually. But the discrimination makes sense in that the large issuers create the market power in Visa and MasterCard that has allowed them to increase merchant fees so dramatically in the past. If the largest issuers were stripped out, Visa and MasterCard could continue to set merchant fees for their many small issuers without the sort of anticompetitive clout that they now wield. Moreover, the House Bill exempts small issuers from the mandatory negotiation proceedings, thus recognizing that it is appropriate to treat small and large card issuers differently.