U.S. curbs on merchant credit card fees in doubt

NEW YORK (Reuters) - U.S. lawmakers rushed to limit credit card fees and interest rates on behalf of consumers a few months ago, but merchants may not be that lucky.

Earlier this year, when Congress passed a law limiting increases in credit card fees and interest rates to consumers, merchants initiated a campaign to curb the fees that retailers such as supermarkets and convenience stores pay to banks every time a customer uses a credit card, called interchange fees.

Two initiatives are being discussed in Congress to limit interchange fees, which are set by credit card networks Visa Inc (V.N) and MasterCard Inc (MA.N), but are collected from retailers by credit card issuers such as Citigroup Inc (C.N) or Bank of America Corp (BAC.N).

But the proposals could founder as legislators' attention is divided among healthcare, regulatory reform and other priorities. Doubts about the proposed legislation's benefit to consumers could also torpedo the plan.

Merchants contend the fees, which range from about 1.6 percent to 2.5 percent, unfairly cut into their margins and drive up prices for consumers.

Financial services companies argue that the payments system is based on a pricing system that benefits businesses and their customers. Banks also said that in Australia, where interchange fees were limited a few years ago, consumers did not benefit and credit card fees rose.

Both groups have been lobbying intensively in recent months, but most observers believe the credit card companies have the upper hand.

"We believe that this legislation has no chance of passing this year," Credit Suisse analyst Moshe Orenbuch said in a research note.

"Health care is still topic number one for this year. Our sense is that this discussion resumes next year," Barclays Capital analyst Bruce Harting said in a note to clients.

NO BIPARTISAN SUPPORT

U.S. Representative Barney Frank, chairman of the House Financial Services Committee, said last week during a session that his committee will begin to take a more serious look at interchange fees.

But he did not set a firm timeline for debate on the topic, and his own pending legislation to speed up the implementation debate for other credit card reforms leaves out interchange fees.

UBS analysts said in a note that Frank left a hearing related to interchange fees after only 20 minutes, which seems to suggest the issue is not a "top of agenda" issue for him.

Analysts said Frank is only trying to goad the financial services industry into cooperating on other legislation to protect consumers.

But Representative Peter Welch, a Democrat from Vermont who introduced legislation in June to crack down on interchange fees, said he sees momentum for his bill. "Around here, I take actions to be more meaningful than words," he told Reuters.

"Barney Frank wouldn't have a hearing unless he was actively interested in the legislation," he said.

It is hardly a bipartisan issue. Representative Jeb Hensarling, a Republican from Texas whose views are considered typical of Republicans' thinking on the issue, dismissed the interchange fee issue as "the cost of doing business."

The discussion in Congress points to the conclusion that "interchange is really a business-to-business issue (between merchants and banks) rather than a consumer issue (making broad political support difficult)," UBS analysts wrote.

"There will be less direct appetite from the politicians" to back a bill limiting interchange fees, said Robert Dodd, an analyst at Morgan, Keegan & Co. "I don't think it is a done deal."

The release next month of a Government Accountability Office study about interchange fees in the United States could give the reformers some ammunition.

"A year ago it was a bit of a long shot. Right now it is much more likely to see legislation out" on interchange fees, said Mallory Duncan, chairman of the Merchants Payments Coalition, noting Congressional actions to regulate financial services in recent months.

Duncan said a law would not necessarily include limits to fees, but open the market for more competition. Visa and MasterCard process around 75 percent of electronic payments.

ALMOST $50 BILLION AT STAKE

A recent study by the Merchants Payments Coalition -- which represents over 2 million retailers, supermarkets and convenience stores -- said U.S. interchange fees are up to six times greater than fees in other countries.

But the Electronic Payments Coalition, which represents payment card networks and financial services companies, said interchange fees in the United States are lower than in countries such as Italy, Switzerland, Japan.

U.S. interchange fees rose to $48 billion last year from $42 billion in 2007 and were up 33 percent from 2006.

Even if no bill is likely to pass any time soon, the risk of tighter regulation could eventually force Visa and MasterCard to cut interchange fees, analysts said.

(Additional reporting by Karey Wutkowski in Washington; Editing by Gary Hill)