Payment System Pricing Negotiations As Blood Sport

It seems the stalwart yet feckless defenders of our freedoms collectively known as the U.S. Congress are at it again. Struggling against two disparate groups of special interests, both of whom, it is rumored, consistently drop off huge bags full of unmarked bills as attention getters, our representatives have proposed legislation that, if enacted, will force their own special brand of free enterprise on the payments world. First we consider H.R. 2695, The Credit Card Fair Fee Act of 2009. We will tackle the Senate version, S. 1212 of this special madness in my next blog.

H.R. 2695 purportedly levels the negotiating playing field as it relates to how much merchant should pay for accepting credit and debit cards at the point of sale. In the House’s defense, the current market-based solution is a bit arcane with dozens of players piling on fees and charges that are almost incomprehensible and in many cases indefensible. Granted the big guys pay a lot less than little guys, ostensibly because they generate more volume thus get better pricing. But even the big guys continually bitch to Congress and everybody else that will listen that they pay a lot more than they should.

Congress has apparently listened, at least to the rustle of all that purported cash. Their proposed solution however is so much more than hapless, it is bizarre. It could only be made more bizarre if they had all of the negotiators enter a cage, buck naked and each carrying knives and the survivors get to set prices. In fact, that may improve the outcome. Here is what they propose for real, at least in the House version.

The ten largest credit and debit issuers, the ten largest acquiring banks, the ten largest “covered” credit/debit electronic payment system (more on that in a minute) and the ten largest merchants (based on credit/debit dollar and transaction volumes) will all provide the Attorney General with an itemized list of costs associated with providing or accessing a “covered” electronic payment system. For good measure all parties have to provide copies of the processing contracts each has with each merchant. And they have 30 days in which to comply.

A “covered” electronic payment systems, btw, is one that processes at least 20% of all bank issued credit card and debit card transactions occurring during the last year. That precludes all but one or two processors – everybody else please wait outside, we will inform you of the outcome later if you are good. I have it on fairly good authority that the largest processors have absolutely no clue as to their cost structures so whatever they send in should probable be clearly labeled “fiction.” Merchants have it easier as they have cancelled checks to refer to, compensating balances and promotional allowances notwithstanding.

Each of the players mentioned above also have 30 days in which to submit to the Attorney General a negotiation schedule and if they miss the deadline the AG will set the schedule for them. These negotiations are designed to result in a fairly and equitably derived price that all merchants will pay for access to the credit and debit authorization and settlement systems regardless of size or volumes – one size fits all. Wal-Mart will pay the same as the local shoe store. Understand that we are not talking about interchange, we are talking about discount – the whole price for access.

Once completed, the negotiators have to file the agreement with the AG disclosing how the deal affect the U.S. and international marketplaces, how the fees are broken out by player a comparison of prices across the largest ten international markets and other conditions. Read very carefully, prices negotiated under the auspices of this proposed legislation will have international implications. Hmmmm. It must be noted that ISO have no say in these negotiations whatsoever but card issuers do. Perversely, Credit Union with assets of less than $1 billion are exempt from this bill. WTF! They wouldn’t be included to begin with given their size. Another lobby heard from!

Finally, two major issues are not addressed in this finely crafted piece of proposed legislation. We have no clue as to what to do when, not if negotiations fail to come to a satisfactory conclusion. And we have no idea as to how long the prices will remain in place, nor do we see a mechanism for adjusting them should market conditions change. Apparently these are not significant enough to take into account. Free enterprise be damned – full speed ahead!

Paul Martaus

paul@martaus.com