Information on Merchant Accounts,
Ecommerce and Credit Card Processing

July 24th, 2008 by Jamie Estep

Interchange regulation – H.R. 5546

Filed in: Industry News, Merchant Accounts | 4 comments

Right now, there’s a battle waging for the processing industry. On one side is a massive group of retailers including Walmart, Target, the NRF and many others and on the other is Visa, MasterCard, Amex, card issuing and processing banks. This outcome of this battle will ultimately decide whether the government will regulate credit card interchange, or it remains controlled by Visa and MasterCard.

Retailers argue that Visa and MasterCard are using anti-competitive practices to maintain a monopoly on the processing industry. Visa and MasterCard declare that government regulation of interchange will create a non-competitive situation and ultimately cost businesses more than they are currently paying.

In theory this act (H.R. 5546) sounds to be a simple solution to a complex problem. The government gives retailers the ability to negotiate their interchange fees, done… What this resolution doesn’t take into account is that the system is so much more complex than just some simple interchange negotiation. This resolution would be on-par with telling every gas station in the country to negotiate prices with their customers, good luck… It doesn’t in any way address the cause of the interchange prices, it only addresses the result of where interchange is set at.

Why interchange should not be regulated:

Irresponsible: – The current concept of interchange regulation is in reaction to a slowing economy, and massive inflation in oil and food prices, and not the interchange fees themselves. This is an irresponsible and ineffective way to handle a complicated situation. Putting all personal opinion aside, the US Government Accountability Office, the US Justice Department, the American Banking Association, and the Federal Trade Commission have all warned congress against regulating interchange.

“Policymakers should heed the concerns raised by both the FTC and the Justice Department,” said Yingling. “The many benefits merchants receive from accepting payment cards come at a cost and intervening in this properly functioning market by establishing artificial interchange rates will ultimately hurt consumers.”

Congress passing this bill would be a matter of personal politics and not good government. These organizations exist to control and regulate trade and economy. If they are saying not to do it, it’s a good sign that personal issues are overshadowing what’s important in the overall picture.

Impossible Solution: – The resolution for setting interchange prices is by a panel of three appointed “Electronic Payment System Judges” who set interchange rates. How can setting fixed prices possibly allow for a competitive marketplace. If every store owner had to set their prices the same, how would there be any competition.

It also gives merchants “in theory” the ability to negotiate their interchange rates. Since interchange rates are set by Visa and MasterCard and not a business’s merchant account provider, Visa and MasterCard are going to have a lot of work on their hands. There are roughly 25 million businesses in the US. Giving everyone the ability to directly negotiate with Visa/MC is not going to simplify anything. Since interchange will be set based on cost and return, then I can see the cost going up a lot when 25 million people pick up the phone to call Visa.

The market is “not” non-competitive: – Open up a new business and see how many calls you get from merchant account providers. There is fierce competition in the merchant services industry. Putting scams aside, this competition benefits merchants in the form of the lowest possible rates, and best service. This is the definition of a competitive marketplace and is exactly what keeps the market fair. Interchange is extremely complicated, and only recently has become somewhat transparent. The actual problem being described is not the cost, it’s the complexity.


The bottom line is that this is an extremely complicated situation that is being dealt with through personal emotions and haste instead of facts and understanding in a time of economic instability. Interchange has become a scapegoat for a falling economy and the fallout from rising oil prices and commodities inflation.

Related relevant posts:
An Ugly Regulatory Bill
Congressional Price Fixing
Electronic Payments Coalition Statement on Price Control Legislation (H.R. 5546)
Interchange bill may be dead for ’08
No Credit to Congress

4 Responses to “Interchange regulation – H.R. 5546”

  1. Aubrey Clark August 12, 2008 at 9:04 pm

    Maybe a compromise? The bill should only allow the brand names i.e. Mastercard, Visa, and Discover, to charge an interchange fee and mandate that this fee be shown on the transaction receipt. Then, prohibit the card issuers (the banks) from charging any “processing fees” on the retail transaction. This will force the banks to pass along their processing costs and profits directly to the consumers in the form of a fee that is printed clearly on their statement. By doing this, consumers will see exactly what their credit card usage costs them. Once banks are forced to show the hidden fees, this will create competition between the banks which will help lower fees for credit card customers.

  2. Josh N. October 15, 2008 at 7:37 pm

    I work for a resort sales company which has approx 1/3 of its incoming cash from credit card transactions. The latest issue we have with merchant account services is that they say we have had too much business through our card systems and thus the risk is too high and they immediately begin collecting a reserve, ours is now at $500,000. They can hold this reserve for the life of our business relationship with them, it can continue to go up depending on the risk they assess with no additional objective transparent guidelines and they can hold this money up till 270 days after we end the relationship. They have collected anywhere between 100% down to 20% of reciepts until they have reached that number. We have a company that employs 300 people and it is the cash reserves that are killing us, not the other credit crunch or the interchange fees.

  3. Dat To December 26, 2008 at 5:18 pm

    Your site is has amazing information. This is an incredibly complex industry and you are right about not regulating interchange rates. If the government steps in and regulates interchange, then every other fee will go up to make up for it. Band aid solutions. Every time the government tries to ‘solve’ something it creates another program with another budget that never disappears even if it doesn’t work and actually creates a whole new set of problems. I have empathy for Josh’s situation- these stories are true and rampant. Ridiculous. What if people like you and other ethical ISOs put their heads together for practical solutions that would work?

  4. […] to the surprise of the merchant account industry, the congressional bill proposing to regulate interchange, is being attached to the credit reform act and is potentially being voted on tomorrow. Although […]