In a commentary released today, American Antitrust Institute (AAI) President Albert Foer asserts that the MasterCard and Visa payment markets in the U.S. are so broken that only a major change can restore system balance and provide necessary protection to American merchants and consumers. Foer estimates that his proposed federal regulation solution would transfer tens of billions of dollars from big banks and credit card companies back to merchants and consumers each year, resulting in a huge stimulus for the economy.
Acknowledging ongoing antitrust litigation by merchants and two legislative bills pending in Congress to modify some credit card activities relating to interchange fees, but not the fees themselves, Foer claims neither the litigation nor legislation is enough. "Congress should grant the Federal Reserve Board or another agency authority to set a cap on cost-based credit card interchange fees, including a reasonable profit, in order to restore much needed balance to the U.S. credit card market," said Foer.
A previous antitrust suit by the Department of Justice found Visa and MasterCard guilty of restraining trade by prohibiting their member banks from issuing American Express and Discover credit cards. A class action by merchants alleging unlawful tying between credit and debit cards resulted in a $3 billion settlement.
"Clearly there is a problem here, but we can't continue to address it one court case at a time," said Foer. "Nor can we wait for a solution to arise from market competition because MasterCard and Visa obviously have tremendous market power, preventing merchants from rejecting Visa and MasterCard, just as they could not reject checks or cash. A federal fix is necessary to protect American merchants and consumers once and for all."
Foer argues the current proposals simply do not go far enough to provide a fair deal to American consumers who are indirectly paying these excessive fees. "Because merchants must pay the excessive interchange fees, the cost of everything that we buy is inflated," said Foer. "If merchants paid interchange fees to the banks that were more reflective of the true cost of transaction processing, vigorous retail competition would lead to lower prices for consumers."
The commentary also demonstrates that large savings could be had if the government were to recognize that debit cards function as "plastic checks" and, as such, should clear "at par" with paper checks.
Foer represented the Federal Trade Commission while serving as a Commissioner on the National Commission on Electronic Fund Transfers in the mid-1970s. Later, he was CEO of a regional retail jewelry company that accepted Visa and MasterCard credit cards and which also operated its own in-house credit card system.