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Editorial Counterpoint: Merchants need a break as well

Unless the fees banks charge for transactions are regulated, the costs will shift back to consumers.

By K. CRAIG WILDFANG and MARK WILLIAMS

Last update: May 26, 2009 - 9:35 AM

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In its May 7 editorial, the Star Tribune endorsed the Credit Cardholders' Bill of Rights, arguing that it offered long-needed reforms to the credit-card market in the United States. The recent passage of this landmark legislation is a step in the right direction, but reforming the law relating to credit-card charges imposed on cardholders leaves completely unregulated the credit-card charges imposed on merchants but ultimately paid by all consumers in the form of higher prices for goods and services.

Banks and credit-card companies charge merchants tens of billions of dollars in unnecessary fees every year, and with the economy as it is, the time is now for Congress, or possibly the courts, to step in and eliminate those unwarranted and ever-increasing costs.

One immediate priority should be for Congress to regulate the little-known "interchange fees" that are charged to merchants by banks that issue credit cards. Minnesota merchants, from large companies such as Best Buy to the smallest restaurant, collectively pay hundreds of millions of dollars in interchange fees each year. Throughout the United States, these fees cost merchants and customers more than $45 billion annually, and that cost is rising each year.

Moreover, interchange fee levels in the United States are among the highest in the world, and they cannot be explained by any increase in real costs to the banks and the card networks. The principal costs of running a payment card network are primarily computer hardware and software and the network connections that are the equivalent of telephone lines. Costs of all of these things have declined dramatically in recent years, yet the card companies and their large member banks continue to raise their fees.

It's little known that Visa and MasterCard both were created, owned and controlled by essentially all of the banks in the United States. Under the guise of "joint ventures," the largest banks in the country -- Citibank, Bank of America, Chase and others -- sat around a table twice a year for more than 30 years and agreed on the "interchange fees" to be charged to merchants on every credit-card and debit-card transaction. These fees, averaging almost 2 percent of every purchase made with a credit card, are like a privately enacted sales tax, except that the revenue goes to the country's largest banks, not to the government. There have never been any controls within the financial services industry, or from Congress, to stop this fixing of prices to merchants.

Although Visa and MasterCard have recently reorganized and are no longer joint ventures, the big banks are still effectively controlling the interchange fee rates, since the five largest card-issuing banks now account for more than 80 percent of all cards. Many other countries have challenged these fees, including Australia and the European Union, where interchange fees were already substantially less than those in our country. Their antitrust authorities or bank regulators have ordered the fees rolled back or even eliminated. Even without legal challenges, many debit-card networks around the world, including Canada's Interac debit network, operate without interchange fees.

At a time when average consumers -- and the merchants who employ, feed and clothe them -- are suffering from the deep recession, eliminating this $45 billion drag on the economy would provide an obvious and immediate stimulus. Certainly banks like Citibank and Bank of America, after having accepted hundreds of billions of taxpayer dollars to keep them afloat, could afford to give merchants and consumers a break on these fixed interchange fees.

Imposing limitations on unreasonable fees to cardholders while leaving it possible for banks and credit-card networks to raise fees to merchants to compensate for any reduced revenues from cardholders greatly limits the benefits of the Cardholders' Bill of Rights. If policymakers in Washington do not address this problem, merchants can only turn to the courts to use the antitrust laws to provide relief from excessive interchange fees. One way or the other, change must come.

K. Craig Wildfang is a partner at the Minneapolis-based law firm Robins, Kaplan, Miller & Ciresi, L.L.P. The firm is co-lead counsel for a class of merchants who are challenging interchange fees. Mark Williams is president of financial services at Best Buy Co. Inc.

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