Legislation Seeks Fair Market for Credit Card Fees

Editor's Note: This commentary was published in the print version of Modern Car Care before the House Judiciary Committee approved the bill July 16, sending it on to the full House.

Right now there is no market for credit card interchange fees. The fees are fixed by the banks, hidden from the public, and forced on merchants in a take-it-or-leave-it offer. The banks act collectively but merchants cannot. The proposed Credit Card Fair Fee Act, introduced to Congress in June, would create a market for interchange fees for the first time by allowing merchants and the card associations to negotiate on equal footing.

The card associations claim there is no problem with the current system. If I were able to fix prices with my competitors and make more than $40 billion per year doing it, I suppose I wouldn’t think there was a problem either. Of course, just because the price-fixers want to keep doing business the same way doesn’t make it right.

I am not an antitrust lawyer. I am a businessman. But I know that I cannot agree with my competitors to charge the same prices. If we did that it would deprive consumers of the benefits of price competition. Yet that is precisely what the banks that issue credit cards have done for years.

From my perspective, the best way to understand the antitrust problem is by looking at what would happen if the same situation prevailed in my industry. The National Association of Convenience Stores (NACS) does not and never has set the prices or terms by which its member companies charge the public. But let’s say that it set a “default” price for a gallon of gasoline at $9 and that every member of NACS across the country charged that “default” price. The speed at which the Justice Department would haul us in front of them for agreeing to a “default” price would be dizzying. I would fully expect someone to fit me with a not-very-fashionable orange jumpsuit.

Yet that is precisely what Visa does with its banks and, separately, what MasterCard does with its banks. All these banks that are supposed to compete with each other charge the same “default” interchange fees and the rest of us have no choice but to pay them because of the huge combined market power Visa and MasterCard wield with their banks. And don’t just take my word for it: the Kansas City Federal Reserve has found that merchants like me have no realistic choice but to accept Visa and MasterCard.

The impact on the convenience store industry is incredible. In 2006, the industry paid more to accept cards than it made in pre-tax profits — $6.6 billion to $4.8 billion. The 2007 figures are simply incomprehensible. My entire industry made pre-tax profits of $3.4 billion. Note that our profits went down by more than $1 billion. At the same time, card fees increased by $1 billion to $7.6 billion. And we received nothing more for this additional $1 billion or for the billions of additional dollars these fees increased in prior years.

Processing card swipes probably costs Visa and MasterCard less than before, but now we are paying far more than double our profits simply to accept cards. It is clear that the price for the cashless society is way too high if you let the credit card industry set the rate.

Every time customers buy gasoline, the gas stations they are buying from are likely paying more than twice as much money in fees than they are making. And, every time gas prices go up, the card fees go right up with them.

If you are concerned about prices at the pump, you also need to be concerned about interchange fees. These fees have simply taken over our industry. Some days I think I should just take down my “Rotten Robbie” signs and put up Visa and MasterCard signs. My business is more for them than it is for me.

The Credit Card Fair Fee Act is a critical first step in bringing market fundamentals to this nonexistent market. Critics of this bill say it is a government price-fixing proposal. Nothing could be further from the truth. The bill provides merchants an opportunity to negotiate reasonable terms with the card associations.

However, if a deal cannot be reached, there must be some way to resolve the differences. In the event a deal is not reached, each side will present a final offer. The bill simply identifies a decision-maker to pick the offer that is closest to what would happen in a competitive market. At no point does this bill allow the judges to independently come up with the price of interchange; they do the minimum necessary to say which side has the better offer and that is it.

This is just the type of approach that appeals to me as a businessman. I negotiate the prices and terms of nearly everything that happens with my business. This is the way that American businesses operate. What I need is the ability to present myself to the card associations and banks in the same way they present themselves to me — as a group. The card associations should not be afraid to negotiate on even footing with merchants.

Tom Robinson is president of San Jose, Calif.-based Robinson Oil Corporation, which owns and operates 34 Rotten Robbie gas stations and convenience stores in northern California.