Question: Business versus Business

Businesses are on the opposite sides of a variety of issues. In 2010 retailers sought to reduce the fees they paid on credit and debit card sales and faced off against the card companies and the banks that issue the cards. The institutional arena was Congress. Retailers were estimated to pay $48 billion annually for "swipe fees" on credit and debit card purchases, according to the Nilson Report. Debit cards accounted for somewhat less than half the amount, but the cards were growing rapidly in popularity. Retailers sought to reduce the swipe fees paid when customers used the cards for payments. The swipe fees included network fees that were paid by merchants to Visa and MasterCard and interchange fees of $15.8 billion that were paid by retailers to the issuers of the debit cards, primarily banks such as JPMorgan Chase. The interchange fees amounted to $19.7 billion in 2009, and averaged 1.63 percent of the transaction amount which was much higher than the costs of processing a check. The opportunity for retailers was the Obama administration's financial reform initiative. The House passed its version of the bill, which included a provision to regulate interchange fees, with the Federal Reserve as the regulator. The Senate version of the bill incorporated an amendment authored by Senator Dick Durbin (D-IL) that included the regulation of network fees as well. The shares of Visa fell by 9.9 percent and MasterCard fell by 8.6 percent when the Durbin amendment passed.43 The share prices of the largest card issuers, Citigroup, Bank of America, and JPMorgan Chase, which had debit card usage of $550 billion in 2009, fell between 2.3 and 3.1 percent. Visa stated, "We hope Congress sees today's amendment for what it is-an attempt by retailers to increase their profits at the expense of consumers."44

Lobbying on the Durbin amendment was intense, and after it passed, attention turned to the conference committee that would reconcile differences between the House and Senate bills. Large card issuers such as JPMorgan Chase lobbied intensely against the regulation. The card companies argued that reducing the interchange fees would result in higher charges for consumers. The banks argued that any reductions in interchange fees would require them to raise fees on other services and reduce rewards programs. Noah Hanft, general counsel of MasterCard explained, "We continue to have concerns that the ultimate outcome of this legislation would be the passing of merchant acceptance costs to consumers at a time when Americans can least afford it."45 The banks also argued that any reductions in fees would go into the profits of retailers rather than the pockets of consumers. Ken Clayton of the American Bankers Association said, "We kind of view this as a direct transfer from the consumers' pockets to retailers' bottom lines. Who ends up feeling the burden from this? Financial institutions lose a revenue stream that allows them to offer other services to low-income consumers."46 The retailers were equally active. Home Depot stated, "Any relief as it pertains to these fees will give Home Depot the ability to reduce our cost of doing business . . .. Such benefits are likely to include lower prices and investment in the business to better serve customers."47 Scott Mason of Lowe's Companies said, "Every dollar we pay the credit-card companies is a dollar we can't pass on to consumers or use to hire employees. Literally you are talking about hundreds of millions of dollars."48

Eric Hausman of Target Corporation said, "They do cost us hundreds of millions of dollars-an expense we cannot control-and become part of the cost of goods sold, which many people do not realize."49 The conferees eliminated the regulation of network fees, and the shares of Visa and MasterCard increased by 5.0 percent and 4.3 percent, respectively. The House and Senate conferees failed to agree on a rule for interchange fees, but instead mandated a study to be conducted and a deadline to act. The language in the conference agreement directed the Federal Reserve to limit the interchange fee to a level that was "reasonable and proportional" to the actual costs of processing transactions. The agreement gave the Federal Reserve 9 months to study the issue and set a limit on the fees.50 John Emling, a lobbyist representing the Retail Industry Leaders Association, said, "We have the data ready and we have the right people ready to go to the Fed, and we've had an ongoing dialogue with the Fed."51 Retailers would also be allowed to offer discounts to people who paid in cash, but the discounts could not depend on the issuer of the card that would otherwise have been used. Merchants were also allowed to run their debit card transactions on two networks, so a transaction paid with a MasterCard debit card could be processed on VisaNet. These provisions gave merchants greater bargaining power relative to the card issuer.

The Federal Reserve was required to issue a final rule by April 21, 2011, and in advance it issued a proposed rule that would cap the swipe fee at $0.12. The average charges under the current system were $0.44, so the card issuers would lose huge amounts of revenue. The Boston Consulting Group estimated that card issuers would lose $9 billion in revenue because of the Durbin Amendment and another $16 billion because of the Federal Reserve's anticipated rule making and the Credit CARD Act of 2009.52 Banks with assets less than $10 billion were exempted from the regulation, but even though their fees were exempt, credit unions and community banks were concerned about competitive forces. The Fed's proposed rate generated renewed political activity by small community banks, which argued that they would be forced by competitive pressures to meet the $0.12 rate. The banks said this would force them to raise fees on depositors' accounts or reduce the financial products they offer. In response the Financial Institutions and Consumer Credit subcommittee of the House Financial Services Committee held a hearing on the Fed's rate setting. In testimony Federal Reserve Chairman Ben Bernanke said, "It is possible the exemption will not be effective in the marketplace." Sheila Bair, Chairman of the Federal Deposit Insurance Corporation said, "I think the likelihood of this hurting community banks and requiring them to increase fees they charge for accounts is much greater than any tiny benefits retail customers maybe get from any savings." Senator Durbin said that Chairman Bernanke was "just basically wrong."53 The Fed announced that it was reserving judgment about the final rule until all the comments received had been considered. When the proposed rule was announced, the card issuers and banks added a new dimension to the issue in arguing that the Dodd-Frank Act directed it to set a swipe fee that was limited to the "reasonable and proportional" cost of transactions but the Fed had ignored debit card fraud which cost the card issuers and banks $1.4 billion in 2009.54

The banks also claimed that the reductions in swipe fees would benefit large retailers rather than the small retailers that the reduction in swipe fees was supposed to benefit. John P. Buckley Jr. of the Gerber Federal Credit Union, told a congressional subcommittee, "I am appalled that our members will shoulder tremendous financial burden and still be on the hook for fraud loss while large retailers receive a giant windfall at the hands of the government."55 The banks referred to a comment made by a Home Depot executive that the company would gain $35 million from the reduction. The retailers countered with a fly-in by convenience store owners who complained that high swipe fees hurt their competitiveness. " ‘These fees are stunting business growth and hurting efforts to hire more workers and expand operations,' Douglas Kanter, a lobbyist for the Merchants Payments Coalition, a retailer trade group, said recently."56

1. Which interest group, the retailers or the card companies and card issuers, is the stronger? How important are the small banks and credit unions that issue cards?

2. Will a lower swipe fee be passed on to consumers or captured by retailers?

3. Will small banks and credit unions be forced by competition to lower their charges?

4. Is the Federal Reserve likely to reconsider its proposed rule? Which interest group will have the greatest influence on its decision?

5. What strategy should the card companies and the large bank issuers use at this point?