By Patti Murphy
Editor's Note: As part of our retrospective series, we are reprinting Patti Murphy's column addressing early assaults on interchange, published Oct. 22, 2007, in issue 07:10:02.]
Interchange is under attack in Washington … again. Is anybody surprised? I'm not. Ganging up on big business has become a sport for some folks in Washington, and we are heading into an election year. The latest salvos: new complaints from merchants about MasterCard and Visa, and word that the Department of Justice is investigating interchange.
Surely there are other businesses picking the pockets of Americans, you may be saying to yourself, why all the jawboning over interchange?
The truth is that taking down interchange is an issue that ostensibly puts money back into merchants' tills, and small businesses (like retail merchants) are the backbone of the economy and of the electorate. What congressman doesn't want to support a plan that can be construed as saving their constituents millions or even billions of dollars without costing Uncle Sam a penny?
Of course, the money has to come from somewhere, and in the case of interchange it comes from the feet on the street, themselves small business owners. But a lot of people don't see things that way. Heck, how many of the folks we socialize with (outside our work lives) have any idea of what it really is that we do to earn our living? Multiply that number by millions of Americans and you start to get a sense for how huge a task it is to counter attacks on interchange.
And let's be clear, the campaign against interchange is not just a war of words. It's an attack on the economic model that has driven broad-based acceptance of payment cards among both businesses and consumers.
Here's a visual: the card business model as a three-legged stool, with merchants and cardholders each represented by a leg, and banks and their partners represented by the third leg. For stability the stool needs the support of all three legs, and already at least one of the legs is wobbly.
Some folks blame the situation on lawyers; after all, there's a lot of fee income to be had from multibillion-dollar settlements. But the card associations (MasterCard and Visa) and the banks that originally owned them are culpable too.
By settling the so-called WalMart lawsuit out of court in 2003, MasterCard and Visa in effect declared open season on interchange. (Despite its moniker, the WalMart suit was a class action that included thousands of merchants. Under the settlement MasterCard and Visa agreed, among other things, to create funds for multibillion-dollar distributions to merchants for past overcharges.)
The latest attack against interchange comes from the Merchant Payments Coalition (MPC), a confederation of groups representing various categories of merchants and other card-accepting businesses; members are said to represent 2.7 million stores employing some 50 million Americans.
In a letter to the House Judiciary Committee's Anti-Trust Task Force, the MPC accused Visa and MasterCard of obfuscations – muddying the pool of public knowledge about interchange during a hearing the panel held in July.
The MPC argued during those hearings that the way MasterCard and Visa set interchange rates constitute a violation of federal antitrust laws primarily because the associations are owned by banks. Recent efforts to take the associations public and diversify ownership should temper those concerns. But it may not be enough.
The Justice Department apparently is taking another look at MasterCard and Visa. The National Association of Convenience Stores (NACS) reports that a key Justice Department official told lawmakers during a hearing in September that the agency's antitrust division is looking into interchange. Thomas Barnett, the assistant attorney general in charge of that division is reported to have said that the investigation is "comprehensive" and "will take some time."
It wouldn't be the first time federal antitrust lawyers have set their sights on Visa and MasterCard. The Justice Department took the two organizations to court in 1998. Three years later, in a win for the government, a federal court struck down association rules that precluded member banks from also issuing non-bank cards (like American Express and Discover), and three years after that (in 2004) the U.S. Supreme Court served a death knell to the rules by declining to consider Visa and MasterCard appeals.
It's not really clear that the government can build a legal case against interchange, at least one involving antitrust laws. But what about surcharging?
It's not a new issue. Surcharging, or offering discounts to customers who pay by cash rather than card, has been a contentious issue for more than 20 years. Back in the 1980s, when gasoline shot up to nearly $1.00 a gallon, gas stations began offering discounts to cash customers, to the consternation of folks at the card associations and in Washington.
The government's concerns at that time revolved around notions of equal treatment – those consumers who don't have the cash on hand at the time they need to fill their gas tanks should not be punished for paying by credit card.
The MPC brought up the issue of surcharges in its letter to the Judiciary Committee task force. Although MasterCard and Visa have insisted publicly merchants are allowed to offer discounts to customers who pay by cash rather than by card, the MPC argued that behind the scenes merchants who want to do so are undermined.
"[C]redit card companies' rules make cash discounts extremely difficult to offer," wrote the MPC. "Visa in particular has attempted to characterize some cash discounts as a prohibited surcharge on credit card use, and has threatened some merchants with fines of $5,000 a day for offering cash discounts."
Perhaps there is an element of truth in this statement, but it seems a bit disingenuous to suggest Visa and MasterCard are the sole reasons why merchants don't surcharge card-paying customers. One of the first lessons I learned in this business is that merchants want to sell stuff and the easier they can make it for consumers to buy stuff the better. Over the years this has meant adding credit cards, debit cards, prepaid cards and other instruments to their payments mix.
I suspect merchants fear that by making one payment method more expensive than another they may chase off customers. That may happen, but it's a cost of doing business, just like interchange. 
Patti Murphy, senior editor at The Green Sheet, has been following and writing about payments for 40 years and has been working with The Green Sheet for 25 years. Patti is also co-host of the Merchant Sales Podcast. Follow her on LinkedIn at www.linkedin.com/in/patti-murphy-1082911.
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