GAO to Congress: Interchange mandates might help, but not everyone

The U.S. Government Accountability Office weighed in on interchange fees with a 69-page report to the U.S. Congress, released to the public Nov. 19, 2009. Anyone looking for definitive answers to questions as to what, if any, position the federal government should take in the public debate over interchange, however, is apt to be disappointed.

The report – Credit Cards: Rising Interchange Fees Have Increased Costs for Merchants, but Options for Reducing Fees Pose Challenges – was prepared in response to a congressional request tucked into the Credit Card Accountability, Responsibility and Disclosure Act of 2009, the credit card reform bill dubbed the Credit CARD Act and signed into law in May 2009.

Interchange rates are not regulated directly by the U.S. government, but concerns over rising card costs have prompted federal investigations, private lawsuits and legislative proposals. Meanwhile, regulators in more than a dozen countries either have made known their displeasure over rising card costs or actually taken steps to control interchange. The most notable among these is Australia, where the Reserve Bank of Australia forced card companies to accept interchange rate cuts and other reforms.

Proposals

The GAO report examines the impact similar regulations might have in the United States, as well as other ideas that have been discussed publicly. Specifically, the GAO explores four proposals. These would:

• Pave the way for price controls, through which a government entity would have authority to set or limit interchange fees
• Require that consumers be provided interchange fee disclosures
• Prohibit card network rules that prohibit merchants from steering customers away from paying with high-priced cards
• Grant waivers to anti-trust laws to allow merchants and issuers to negotiate interchange

Repercussions

The report concludes that if any of these proposals were adopted, merchants would likely benefit from lower interchange. Even some consumers might benefit, the GAO suggested, that is if merchants actually passed along their savings in the form of lower prices.

On the other hand, the GAO noted, some of the considered changes would also result in higher costs to cardholders, as issuers look to recoup losses in interchange revenues.

"Each of these options also presents challenges for implementation, such as determining at which rate to set, providing more information to consumers, or addressing the interests of both large and small issuers and merchants in bargaining efforts," the congressional watchdog agency wrote.

For example, the report notes that issuers, "particularly smaller issuers such as community banks and credit unions" have come to rely on interchange as a "significant" source of revenue.

Considerations

The GAO's report to Congress also explains how credit card markets differ from other markets – the fact that credit cards constitute a "two-sided" market where two distinct groups (merchants and consumers) pay for goods and services provided by a single network. And it likens credit cards to newspapers, which charge lower prices to encourage readers, which then make the publications more attractive to advertisers, who in turn pay more for ad space.

"Just as readers have a variety of sources from which they can receive their news, consumers also have a number of different methods (such as cash, check or credit card) by which they can pay for a good or service," the GAO wrote.

The GAO report includes plenty of data and background information that should prove useful in any discussions of interchange. Credit Cards: Rising Interchange Fees Have Increased Costs for Merchants, but Options for Reducing Fees Pose Challenges (GAO-10-45) is available for downloading at the GAO Web site, www.gao.gov.

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