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, here, here 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).