Battle lines are being drawn between the merchant and acquiring communities. After years of acceding to the card Associations' dictates regarding the policies, procedures and costs associated with card payments, merchants are demanding change.
And they've enlisted government officials, the media and the card-carrying public as allies. Topics like interchange are no longer arcane matters rarely understood outside the confines of the bankcard system.
So heads up: If we, in the payments industry, do not take steps to address this discontent soon, the big hand of Uncle Sam may do it for us.
Consider, for example, this recent headline in the Pittsburgh Tribune-Review: "Credit Card Interchange Fees Spark Disputes Among Small Business Merchants."
With a daily readership of about 150,000, the Tribune Review is the second largest newspaper in Pittsburgh.
Or contemplate the reaction of an Arkansas state legislator when a constituent (a local retailer) sent her a copy of an application form for credit card processing services.
"I had trouble reading it even with my bifocals," Rep. Susan Schulte said.
In the waning days of the state's 2007 congressional session, Schulte, a Republican, pushed through legislation that caps at $50 (or one-month's minimum charge) the penalty that can be assessed Arkansas merchants who terminate processing contracts early.
The law, which takes effect at the end of July, also dictates disclosure requirements, down to the size of the print used in agreements.
Industry experts who have reviewed the law complain that it is extremely ambiguous.
For example, exemptions are made for federally or state insured financial institutions and affiliates that offer credit card services.
But ISOs and merchant level salespeople (MLSs), under MasterCard Worldwide and Visa U.S.A. rules, must be agents of acquiring banks, said Mary Dees Griffith, President and CEO of Creditranz.
So where is the bite in the law? Consultant Paul Martaus said he doesn't think the legislation has any teeth.
Under Arkansas law, the legislature is adjourned until January 2009, unless lawmakers are called back for an emergency session.
This means the new law is on the books for at least two years. Schulte said she didn't think a special session of the legislature was likely.
She also said the state had no plans (or budget) for educating the acquiring and merchant communities about the new law, which has been dubbed Act 911.
Asked about enforcement, Schulte said that the law, in effect, gives merchants a legal basis for challenging acquiring and processing agreements.
"If somebody wants to sue, there's now a basis for taking their case to the state attorney general," she said.
Arkansas is one of about a dozen states to consider legislation related to merchant acquiring. However, it may be the only case in which a law was enacted with no prior public debate or discussion.
"The really frightening thing is that this passed without a whisper," Griffith said.
"It concerns me that something with provisions this specific to our industry, along with items that most industry agreements would be in violation of, could pass into law with very little media coverage."
Credit card interchange, a historical perspective:
1958: Bank of America Corp. introduces the first bank credit card, BankAmericard. Within a few years, there is a competing group, the Interbank Card Association. In time, Interbank became MasterCard Worldwide, and BankAmericard morphed into Visa U.S.A.
1971: BankAmericard establishes an interchange fee to be paid by the merchant's bank to the cardholder's bank. The fee is initially set at 1.95% per transaction. MasterCard follows suit. The fee is explained as compensation for the risks of card-issuing banks.
1979: National Bancard Corp. (Nabanco) sues Visa U.S.A. alleging that when member banks set interchange rates it amounts to price fixing.
1986: A federal appeals court rejects Nabanco's claim, observing that the card industry is nascent, so price-fixing and other antitrust allegations don't hold up. At about the same time, Visa and MasterCard begin "incentive pricing" of interchange to encourage merchant adoption of electronic card capture.
1996: Retailers file a class-action lawsuit against Visa and MaserCard challenging the "honor all cards" rule, which requires merchants accepting any MasterCard and Visa products to accept all such products.
1998: The U.S. Department of Justice files antitrust actions against MasterCard and Visa over so-called exclusionary rules that preclude member banks from issuing nonbank cards, like those of American Express Co. and Discover Financial Services LLC.
2001: A federal court strikes down the bankcard associations' exclusionary rules. Visa and MasterCard appeal, but the appeal ultimately gets rejected by the U.S. Supreme Court.
2003: MasterCard and Visa agree to multibillion-dollar out-of-court settlements with retailers, and to decouple credit and debit card acceptance.
2005: Visa and MasterCard announce new interchange schedules, which, for the first time, tie assessments to the types of card used. So, for example, transactions using cards that are tied to rewards programs are assessed higher interchange rates.
2006: With nearly a dozen legal challenges to interchange by retailers and their champions, a federal district court consolidates them into a single case.
2007: State lawmakers and the media enter the fray. Stories on interchange and other concerns raised by the merchant acquiring community appear regularly in the mainstream press, including publications like The Wall Street Journal and USA Today.
All the attention being paid by the press and lawmakers to card acquiring has created much confusion, especially among the feet on the street, said Robert O. Carr, Chairman and Chief Executive Officer of Heartland Payment Systems Inc.
He characterizes much of the public rhetoric over interchange as "intellectual dishonesty driven by lawyers and the big merchants who just want to lower their costs. It's not really relevant to [smaller] merchants."
Martaus said all the talk of interchange in the popular press has emboldened merchants, but he noted "the popular press usually gets it wrong."
Some in the acquiring industry, like Carr, see the situation creating opportunities for ISOs and MLSs.
Heartland has been getting a lot of press for the Merchant Bill of Rights, a document it created (to the chagrin of its competitors, according to many observers) to "promote fairness and transparency" in card processing.
Unveiled last fall, it includes provisions such as the right to know the fee for every card transaction, and who's charging it, as well as the fees for all surcharges and bill-backs.
"We believe a better-educated merchant is more likely to be a Heartland customer," Carr said. The proof: "Our business is better than ever," he added.
In June, Heartland reported that a merchant survey it commissioned found that only 26% of merchants believe they are being treated fairly by card processors.
Just 21% of merchants understand the various rates, fees and surcharges they pay, the survey revealed.
Not surprisingly, retailing groups seem encouraged by the attention being paid to interchange and related issues.
Mallory Duncan, Senior Vice President and General Counsel to the National Retail Federation, participated in a panel discussion on interchange at the National Conference of State Legislatures' spring forum held in Washington, D.C., in April.
"The activities you are doing in the states to shine a light on these fees and make consumers aware of them is an important step in the right direction," he said.
Duncan, who also chairs the Merchants Payments Coalition, urged state lawmakers to help control interchange pricing. Among other things, he suggested that interchange is erroneously assessed on sales tax amounts.
The MPC is a Washington, D.C.,-based group established to lobby lawmakers on interchange.
It includes as members trade associations representing most major categories of merchants, including supermarkets, convenience stores, drug stores, online merchants and florists.
The Electronic Transactions Association, meanwhile, is trying to engage federal policymakers in an educated dialogue on interchange and other matters related to card acquiring.
On July 9, the group will hold a half-day education and discussion forum for congressional staffers and regulators.
The meeting, the ETA's second in as many years, will feature industry experts discussing the responsibilities of parties to card transactions.
Rob Drozdowski, ETA Senior Director for Research and Information, said the Washington, D.C.,-based association also hopes to stoke interest among regional payments industry associations to take similar steps.
He said it's a real challenge for a national group like the ETA to keep up with initiatives at the state level.
Will you take up the cause in your hometown?
A little self-regulation could go a long way toward keeping the legislators' focus off the payments space and on issues wherein they can do more for the common good.
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