Justice Suit Hinders Push for Interchange Fee Bill

WASHINGTON — While the Justice Department's antitrust lawsuit against three major card networks appeared to bolster merchants' case for regulating interchange fees, it may also have undercut a push for legislation targeting the issue.

For years, retailers have lobbied Congress to pass a bill that would give them more say on interchange fees, arguing they are too high and amounted to price fixing.

They won a partial victory this year with the passage of the regulatory reform law, which gave the Federal Reserve Board power to regulate interchange fees on debit cards.

But the Justice action goes well beyond the Dodd-Frank provision and lets retailers tackle the issue from another direction by allowing them to give consumers incentives to use credit cards that cost them less money.

"This gives merchants a lot of important tools," said Douglas Kantor, an attorney for the National Association of Convenience Stores and a partner at Steptoe & Johnson. "It doesn't mean by any stretch that the issue is over. But this takes some important things that merchants felt were really necessary to bring market pressures to bear, and it does them already, without the need for legislation."

The Justice action is the second significant victory for retailers this year. Under an amendment written by Sen. Richard Durbin, D-Ill., the Fed will write rules requiring that interchange fees for debit cards — but not credit cards — are "reasonably and proportional" to the cost of clearing a payment.

While merchants also wanted the provision to bar networks from penalizing retailers that promote the use of certain cards with lower fees over others, they settled for language that allowed incentives for the use of certain payment forms — such as cash — over others.

But retailers were still seeking legislation that would have targeted credit card interchange rates. Under previous bills supported by merchants, legislation would have removed an antitrust exemption surrounding such fees and appointed a panel of judges to address the issue.

The federal case strongly supported merchants' arguments that they should be allowed to steer consumers to particular cards and kinds of payments, but went far beyond the Dodd-Frank provision.

A settlement reached Monday with Visa and MasterCard, the Justice Department said, "would require the two companies to allow merchants to offer discounts, incentives, and information to consumers to encourage the use of payment methods that are less costly." (American Express is fighting the suit.)

Some said this effectively addresses retailers' issues, making a push for stronger interchange limitations moot.

"This probably weakens the argument for price controls on the credit cards, because it's giving the merchant greater power to steer consumers into lower-priced cards," said Jaret Seiberg, an analyst at Washington Research Group, a division of Concept Capital.

Kantor said Durbin's amendment and the Justice case essentially work in tandem. "What the Congress did and what DOJ did yesterday enforcing antitrust laws absolutely work together to help create market forces and help merchants get the benefit of price competition," he said.

He added that the Justice ruling means the card networks "when they set interchange fees will have to think about: Are people going to discount my type of card, and therefore help volume, or will they discount for somebody else's cards … and should I reduce my interchange fee? That's never been a question."

For their part, banking industry representatives who fought hard against Durbin's amendment in the debate over the broader Dodd-Frank law, said the federal lawsuit appears to make further legislative action less necessary.

"It certainly gives the merchants more control over the interchange costs and does suggest the marketplace will sort out how this issue can be resolved," said Ken Clayton, the chief legislative counsel for the American Bankers Association. "It does go directly at the merchants' complaint that they lack control over interchange pricing. … We'll have to see if this results in any consumer benefit as opposed to merely padding the merchants' bottom line."

Still, the retailers are not yet declaring victory.

"This was an important step, but it's still just a step. The Department of Justice has decided to focus on one set of anticompetitive practices, but there are other anticompetitive practices remaining," said Mallory Duncan, a senior vice president and the general counsel of the National Retail Federation.

"There are other practices out there that card companies engage in that are still anticompetitive and they may be addressed by Congress, or by other pending litigation, or by future action by the Department of Justice," Duncan said.

Under the settlement with Visa and MasterCard, which must still be approved by the U.S. District Court in the Eastern District of New York, the two companies are required to let merchants give customers an instant discount or rebate for using a particular card network, as well as simply promote the use of a particular network or low-cost card.

Ed Mierzwinski, the consumer program director for U.S. Public Interest Research Group, said that by limiting the ability of networks to set terms on credit cards with merchants, the Justice action may prove more significant than the Durbin amendment.

The Federal Reserve's rulemaking required under Dodd-Frank "is narrow and it is limited explicitly to debit cards," Mierzwinski said.

"This case addresses credit cards, which is where the lion's share of the money has been and where the merchants feel they were most aggrieved."

He and others said the lawsuit could strengthen the Fed's hand in proposing a robust system for regulating debit interchange fees.

"The impact to the Fed is it makes it doubly clear that policymakers believe we need to have more competition in this broken market," Duncan said. "It reinforces what Congress has already told them — that competition is king."