Attorneys Spar over Interchange Fees

By Lee, W. A. | American Banker, March 9, 2001 | Go to article overview

Attorneys Spar over Interchange Fees


Lee, W. A., American Banker


The class action suit against Visa and MasterCard by a group of merchants led by Wal-Mart may still lack an opening date, but rehearsals have begun in earnest.

A dry run of sorts took place on Wednesday. While far from the courtroom, the exchange -- which took place under the protective auspices of the American Bar Association's antitrust section -- offered a window into the arguments likely to emerge in the battle over the associations' merchant interchange fees.

Participants included Stephen V. Bomse, an outside counsel for Visa U.S.A. who helped defend the association in last summer's antitrust trial brought by the Justice Department. He also represents Visa in the as-yet-unscheduled Wal-Mart civil trial.

On the other side were Alan S. Frankel, an economist who directs the Law and Economics Consulting Group in Evanston, Ill., and David A. Balto, the Federal Trade Commission's assistant director of the office of policy and evaluation.

The arguments Mr. Balto and Mr. Frankel made against interchange may well recur in the retailers' lawsuit, which was first brought by Wal-Mart but has attained class action status. Visa and MasterCard have appealed that status.

Visa U.S.A. and MasterCard set the rates of interchange -- a fee, based on a percentage of the transaction cost, that a merchant's acquiring bank must pay to the customer's card-issuing bank -- and the retailers contend that the rates they set for signature-based debit cards are unfairly high.

Mr. Balto said that interchange was created to help card-issuing banks recover costs they incurred through losses, float, and fraud, but that historical justifications are irrelevant now that transactions have migrated from paper to electronics. Interchange rates are no longer "a neutral transfer" of money between issuers' banks and merchants' banks, he said.

"Visa had a really good story in the 1970s, when most transactions were on paper, but now the risks of loss are negligible," Mr. Balto said.

Mr. Bomse, a partner at the San Francisco firm Heller Ehrman White & McAuliffe LLP, called interchange a necessary "mechanism" underpinning the card-based payments system. He argued that the payments system is a "two-sided market" consisting of merchants and cardholders, and said, "Interchange fees are simply a matter of an interdependent payments system."

"Look," Mr. Bomse said. "Visa and MasterCard are great deals. They are amazing products that confer enormous benefits to both cardholders and merchants. Maybe we ought to be awarding medals rather than threatening treble damages," which is what the retailers' lawsuit seeks.

Mr. Balto was the official moderator of the American Bar Association forum, which was held at the Washington law offices of Arnold & Porter and transmitted by video to law firms in other cities, and Mr. Bomse and Mr. Frankel were the official guest speakers. But arguments were made by all three, before an audience that included Melvin A Schwarz, lead prosecutor in the Justice Department's unresolved antitrust case against Visa and MasterCard; Marcy Wilkov, in-house counsel for American Express; and Brian P. Brosnahan, another Heller Ehrman lawyer who represents Visa.

Mr. Frankel, an economics consultant who has worked extensively with the banking and credit card industries and the Justice Department, argued that interchange gives the card associations a license to collect taxes. …

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