THE INTERCHANGE WAR

We’re accustomed to seeing citizens storm Washington, DC, en masse to communicate their messages and concerns.  We’ve seen the war protesters.  We’ve seen the Million Man March.  We’ve seen the “tea party” crowd, too.  The other day, 7-11 stormed Capitol Hill.

That’s right, 7-11.  The purveyors of beef jerky, Slurpees and gasoline have a gripe–and it doesn’t have anything to do with those packs of teenagers hanging out in their parking lots.

7-11 store operators are angry about interchange fees.  Those are the fees retailers are charged by the banks every time they accept a credit card as a form of payment.  When you use plastic to pay for your morning gas and coffee, 1%-2% of your money goes to the banks, not 7-11.

As you can guess, that adds up in a hurry.  In the midst of an economy lousier than a frozen burrito, it’s more than a slight irritation to the store owners who’d like to think of that money as being theirs.  The banks say it’s the price of doing business, an unavoidable part of our transition to a less cash-reliant economy and a sign of the economic times.

Either way, we ended up with a bunch of 7-11 stores encouraging their customers to sign a petition in favor limiting and/or rolling back interchange fees.  The representatives of those stores took a break from charging $3.00 for a loaf of bread to rally in Washington, bringing their massive collection of petitions with them in cardboard boxes.

THE 7-11 ARGUMENT

7-11 maintains that the interchange fees are a profit center for already-fat banks and that they make it harder to keep their stores operating in the black.  They argue that this particular “hidden fee” has an impact on the prices they charge, effectively taxing their customers.

Allison Lin at MSNBC summarizes the retailer’s position (which, by the way, isn’t limited to 7-11–they just happen to be more organized than other retailers at the moment):

Retailers argue that the system for setting such fees subjects them to restrictive rules and is not competitive enough. They are calling for congressional regulations.

“The consequences of the card companies’ practices are hurting our customers and are hurting us,” said Mallory Duncan, general counsel for the National Retail Federation and chairman of the Merchants Payments Coalition, which is calling for stiffer regulation of the fees charged to retailers.

The banks got their bailout.  7-11 wants a fee rollback.

THE BANKS’ AND CREDIT CARD NETWORKS’ RESPONSE

As you’d probably expect, the banks aren’t conceding the idea that they’re in the process of crushing retailers as part of some greed-inspired money grab.  They have a series of slightly less offensive responses to the 7-11 gripe.

Initially, they argue that retailers get their money from those transactions even if the credit card holder later defaults on his or obligation.  As we’ve discussed numerous times the last few weeks, the number of delinquencies and charge offs for credit cards is up with the economy being down.  When those consumers default on their cards or eventually file a Chapter VII bankruptcy, the banks don’t get paid.  The retailer, on the other hand, has already banked his or her money.  And they sidestep all risk for a nominal charge, the banks and credit card networks claim.

Chris McWilton from MasterCard explains:

“The merchants don’t have to worry about whether they’ll be paid. Even if the consumer doesn’t pay (the credit card bill) for 30 days or if the consumer defaults, the merchants are protected.”

Additionally, the card companies and banks claim that history demonstrates that interchange fee rollbacks don’t really help consumers.  A regulatory move in Australia, they maintain, didn’t cut prices for consumers in the stores but it did pass on the expense previously carried by the retailers back to them in the form of higher credit card fees and rates.

They also maintain that the petition drive that filled those cardboard boxes was disingenuous.  The Wall Street Journal reports:

“This petition is not what it appears to be. 7-Eleven used deceptive language to trick their customers into signing something they thought would save them money,” a coalition of banks and card network operators said in a statement.

A STICKY SITUATION

So, the battle lines are drawn.  Who’s right?  Who’s wrong?  It’s a tricky question.  While some of us may instinctively want to side with anyone who’s willing to rip into the banks and credit card networks, this isn’t a clear-cut case.  As Linn’s article observed:

“The question is whether they’re using their market power to make an excessive profit, and, if so, what would you do about it?” said Richard Schmalensee, a professor of applied economics at Massachusetts Institute of Technology, who has studied the issue. “There’s no good answer there.”

Schmalensee said it’s also hard to judge how much, if any, impact the fees have on the prices that are eventually charged to the consumer. That’s because so many factors go into pricing individual items.