NRF Says Credit Card Practice Violates Federal Antitrust Law

For Immediate Release
Contact: J. Craig Shearman (202) 626-8134
shearmanc@nrf.com

NRF Says Credit Card Practice Violates Federal Antitrust Law

WASHINGTON, July 19, 2007 – The National Retail Federation today urged Congress to address soaring credit card interchange fees, saying in testimony before a House committee that interchange practices are a violation of federal antitrust law that will cost consumers more than $40 billion this year.

“The collective setting of interchange fees by Visa and MasterCard represents an on-going antitrust violation, and it costs merchants and their customers tens of billions of dollars annually,” NRF Senior Vice President and General Counsel Mallory Duncan said. “This market is broken. It needs transparency and genuine competition. Currently, the only semblance of competition is the battle between Visa and MasterCard to get more banks to issue their cards. And how do they do that? By promising the banks they’ll extract more interchange from consumers than the other guy. This is the only market I know of where the parties compete to raise prices rather than to lower them.”

“The credit card system is an important component of our economy, potentially benefiting consumers, merchants and banks alike,” Duncan said. “But it has become dramatically tilted in favor of the two cartels that control the market. There are several pending lawsuits, but the courts’ remedies for systemic problems are limited. Courts can deliver damages, prohibit specific conduct, or become regulatory czars. Congress has much more nuanced and flexible tools at its disposal. We urge you to study this problem and work with all of the parties to determine how best to restore a truly open and competitive market.”

Duncan, who chairs the Merchants Payments Coalition – a group of close to 30 merchant trade associations working to address interchange – testified on behalf of the coalition at a hearing held today by the House Judiciary Committee’s Antitrust Task Force. The hearing was the fourth congressional session this year to examine credit card fees, and the first to focus specifically on interchange.

Interchange is a fee averaging close to 2 percent that Visa and MasterCard banks charge merchants every time a credit card or signature debit card is used to pay for a transaction. Visa and MasterCard collected more than $36 billion in interchange fees last year, up 17 percent from 2005 and 117 percent since 2001. This year, the amount is expected to top $40 billion, or about $300 per family. Interchange is largely unknown to most consumers because Visa and MasterCard don’t disclose the fee on monthly statements and prohibit merchants from disclosing it on receipts.

Duncan outlined for lawmakers how Visa and its member banks come together to set interchange rates that all the banks agree to charge regardless of which bank’s name is on a card. MasterCard follows a different procedure that also results in all its banks agreeing to charge the same. In either case, the two card associations each operate as illegal price-fixing cartels in violation of antitrust law, Duncan said.

The banks, operating under the banners of Visa and MasterCard, then insist that merchants accept the cards, fees and related rules on a take it or leave it basis with no opportunity to negotiate the terms, Duncan said. With Visa and MasterCard together controlling at least 80 percent of credit card purchase volume, the associations hold such a large degree of market power that retailers cannot afford to refuse to accept the cards, he said.

Under Visa and MasterCard rules requiring that the regular price for an item must be its credit card price, separate cash and credit prices are made virtually impossible, Duncan said. Retail profits average about 2 percent – ironically about the same as interchange – so retailers cannot simply absorb the interchange fee. Even if retailers split the difference because not everyone uses plastic, an item that would otherwise sell for $99 has to sell at $101, and all customers pay the credit price even if paying with cash, he said.

Duncan said the impact goes beyond retailers and consumers, citing the case of Balliet’s, a women’s clothing store in Oklahoma City where interchange fees last year rose to more than $80,000, topping the $60,000 spent on employee health insurance. In order to pay Visa and MasterCard in 2007, Balliet’s was forced to reduce its health insurance contribution from 70 percent to the 50 percent minimum required by its insurer. In 2008, the company may be forced to drop coverage altogether if interchange continues to rise.

The National Retail Federation is the world's largest retail trade association, with membership that comprises all retail formats and channels of distribution including department, specialty, discount, catalog, Internet, independent stores, chain restaurants, drug stores and grocery stores as well as the industry's key trading partners of retail goods and services. NRF represents an industry with more than 1.6 million U.S. retail establishments, more than 24 million employees - about one in five American workers - and 2006 sales of $4.7 trillion. As the industry umbrella group, NRF also represents more than 100 state, national and international retail associations. www.nrf.com

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