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Interchange Legislation Overview

posted by Adam Levitin

It's summer, so it must be interchange season here in DC.  A trio of interchange-related bills have been introduced (or really reintroduced) in Congress.  First, there is the House version of the Credit Card Fair Fee Act of 2009, H.R. 2695, sponsored by Representative Conyers.  Second, there is the Senate version of the Credit Card Fair Fee Act of 2009, S. 1212, sponsored by Senator Durbin.  And third, there is the Credit Card Interchange Fees Act of 2009, H.R. 2382, sponsored by Representative Welch.  I think it is useful to summarize what these bills would do and their approaches to interchange regulation. 

 I've blogged far too much about interchange over the last couple years (see here, here, here, here, here, here, here, here, herehere and here). It's important as an antitrust issue between merchants and banks, as a consumer protection issue because of the regressive cross subsidy it creates among consumers and because it encourages greater consumer card use and thus leverage, and as a bank safety-and-soundness issue because it encourages weaker underwriting.  The last point is not something I've blogged much about, but it's pretty simple:  guaranteed interchange revenue enables weaker underwriting standards the same way as points and closing costs on mortgages; when some revenue is guaranteed up front, greater risk can be assumed on the back end of the deal.

Another preliminary matter:  interchange is not a partisan issue.  Although the lead sponsor on all of the bills are Democrats, there are also Republican cosponsors, and the interchange issue has really cut across party lines.  OK, now I'll get to it.  For more on the bills, see below the break:

H.R. 2695 (Conyers' bill).  The Conyers' bill would create an exemption in the antitrust laws to allow merchants to form collective bargaining units to negotiate rates and terms of accepting payment cards with any electronic payment system with over 20% market share (credit/debit combined).  That means MasterCard and Visa only.  To facilitate the negotiations, there is are disclosure requirements for each side.  While there is to be some supervision by the Attorney-General, there are no consequences for unsuccessful negotiations.  

S. 1212 (Durbin's bill).  The Durbin bill looks very much like the 2008 version of the Conyer's bill before it's committee markup.  This bill starts with the disclosure facilitated negotiations, but adds in a consequence for failure to reach a voluntary deal:  going before a special three-judge panel.  The panel would then be required to pick between proposals from each side based on the one that is closest to what it thinks would prevail in a perfectly competitive market.  

In the coming months we will see the Durbin bill attacked as authorizing "judicial price setting" or the like. That's just not accurate, and is a dodge from addressing the merits of interchange regulation and the bill generally.  Under the Durbin bill, the judges do not set the interchange rates, they choose between a suggestion by the merchants and one by the card network.  Picking from a limited menu is very different than picking willy-nilly.  Moreover, the system, which is modeled on the one used for baseball salary arbitration, is meant to avoid a judicial decision.  The threat of a judicial decision is meant to encourage risk-averse parties to reach a deal themselves.  

H.R. 2382 (Welch's bill).  The Welch bill takes a very different tack than the Conyers or Durbin bills.  Whereas Conyers and Durbin aim to solve the interchange problem by opening interchange up to negotiation on a leveled playing field, the Welch bill instead focuses on the credit card network rules that restrict merchants' ability to select which cards they wish to select and on what terms.  The Welch bill would prohibit card networks from restricting merchants from steering consumers to particular payment methods, from limiting how merchants can price for payment methods, and from limiting merchants in their ability to choose whether they will take certain payment methods for certain transactions or at certain locations.  It also provides that card networks can't charge merchants more for taking rewards cards than non-rewards cards.  

I've left out lots of important details about the bills, but to wrap up the post, but to conclude I want to emphasize the difference in the approaches, and the trade-offs among them.  There's a lot to commend in all these approaches, but it's important that we recognize the choices and assumptions being made.  

The real issue among these bills is whether to encourage a negotiated settlement or simply legislative and outcome that might be very similar to a negotiated settlement. As a general matter, negotiations are exactly where we want to be most of the time:  what's better than helping the parties reach a fair, arms-length bargain?  But the whole point of interchange is to avoid negotiations.  Negotiations can be time-consuming and costly, especially if repeated on a wide-scale; interchange is standardized cost structure that avoids multiple negotiations.

The Conyers and Durbin bill would open up the entire interchange and network rule structure to negotiation, and there could be multiple outcomes.  These outcomes could involve lower rates and/or relaxed network rules.  The Welch bill, by contrast, would keep the interchange structure intact, but it would subject it to downstream market pressure--if interchange rates remained preternaturally high, merchants would have an incentive to pass on the cost to card holders; if rates fell sufficiently, merchants wouldn't bother with pass-thru pricing because of transaction costs.  In essence, the Welch bill aims to legislate a result that might occur through negotiations.  Depending on what we think about the transaction costs and expressive value of the negotiations, it might or might not be worthwhile cutting to the chase and legislating what would be akin to the negotiated outcome.  

All said, as regulatory responses to interchange go, the trio of existing bills is really quite restrained. None of these bills take the public utility approach that has been adopted elsewhere (e.g., Australia), where there are governmental limits set on interchange rates. None of them would mandate that cards be routable on multiple networks at the merchant's choice.  And none of them mandate a creation of a low-cost public competitor (namely the Federal Reserve) to private payment card clearance networks (the way we have for checks, wire transfers, and ACH, and, for a 22-year period, cash).  I'll blog more about the last option (public-private competition) in the coming days, not least out of shameless self-promotion (I've got a short paper proposing this as a solution; I'll be posting on SSRN shortly).  


I can't imagine what the Conyers bill would actually accomplish. I would think that a negotiated interchange fee is whatever Walmart or Target are willing to agree to regardless of who is or is not riding their coattails.

Nor do I see how any of this benefits any consumer. Retailers are not going to be compelled to pass interchange savings along to cash or credit customers. Card issuers will set rates and cardholder fees higher to make up for the lost interchange income.

So I guess if I am Walmart/Target I lobby like mad for this to pass. Looks like the retailers are the only ones that benefit.

FJP beat me to the punch on a couple of comments, but I do have some questions. The first are practical questions, the second more philosphical.

First, I don't understand how the negotiations in the Durbin and Conyers bills are supposed to work. Start with the Durbin bill. I agree that it doesn't involve "judicial determination" of card fees as the "electronic payment system judges" pick one of the two final offers, but how are they supposed to do so? According to the text of the Durbin bill that I tracked down, it states that the judges

"shall select the final offer of fees and terms that most closely represent the fees and terms that would be negotiated in a hypothetical perfectly competitive marketplace for access to an electronic payment system between a willing buyer with no market power and a willing seller with no market power."

Do you know what those fees are? Does anyone? If so, why not just pick them now, and be done with it? How do we even think about the appropriate model for determining what fees satisfy those criteria in this type of market? The discussion elsewhere in the bill seems to suggest that "costs" will play a key role in this determination, so is this a cost-based criterion?

The Conyers bill drops the judges altogether. As you note in your post, what happens then in the event of an impasse? I'm not an expert on negotiation models by any means, but I suspect that the general rationale is that if a coin flip determines the winner if we can't agree, I'll meet my counterpart halfway in negotiations because that yields the same expected payoff with a lower variance. But that outcome (or whatever other outcome is an equilibrium in a particular setting) depends on everyone knowing the rule for selecting the winner in the event of an impasse.

If this is just an attempt to "give everyone a place at the table," then I suppose that's laudable in some ways (but see below). Except for the fact that I cannot negotiate without knowing the implications of different negotiation strategies. Absent such information, is this bill just vacuous? Or does it implicitly reflect a bias that would occur in the negotiations, possibly (but not necessarily) seen most notably in the Durbin version? I'm not supporting the card network position here, rather I'm trying to figure out how, if at all, the negotiating table is slanted. My reading of the bills would be that it is, but I honestly can't figure out. Which doesn't speak well for the bills as public policy.

Second, from a broader point of view, suppose that one concedes that the card networks are colluding. Is the appropriate public policy response to set up a competing cartel? This seems perverse. Not to mention FJP's concern that the competing cartel would be dominated by the big merchants. Now, those big guys might represent the interests of the small guys, but I see no reason why they would. And where do the interests of the end consumer come into play in this whole scenario? At the very least, cardholders are participants in this system. Where is their place at the table?

If, as FJP (who, admittedly, may be a troll like me) suggests, this is all just smoke-filled backroom negotiations among big card companies and banks on one side and big retailers on the other (notably involving tons and tons of legal fees), how is the public interest served?

Just so y'all know, I am not a troll of any kind. I'm a bankruptcy lawyer who primarily represents creditors, generally not relating to credit cards. I comment semi-anonymously by initials only so I don't have to add a paragraph of disclaimers at the bottom saying that these are my personal views and not those of my firm or my clients, etc.

Didn't mean to disparage you or lump you in with a lowlife like me. But Adam appears not to like my sort, with a variety of more or less dire consequences, and I just wanted to point out that my post wasn't that different in spirit from yours.

The comments to this entry are closed.


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