Democrat backs credit card transaction fee bill

WASHINGTON (Reuters) - Legislation is needed to give U.S. merchants more power to negotiate transaction fees with credit card companies Visa Inc and MasterCard Inc, a senior Democratic lawmaker said on Thursday.

The U.S. credit card industry last year rang up $42 billion in interchange fees, which are incurred each time a consumer uses a credit card to buy a product. A merchant's bank typically pays the interchange fee, ranging between 1.6 percent and 2 percent of the purchase price, but the merchant pays it indirectly as a component of a larger set of fees charged by the bank.

Rep. John Conyers, chairman of the House Judiciary Committee, introduced a bill several weeks ago that would create a panel to determine interchange rates and terms.

Critics say the legislation amounts to government price controls and would hurt smaller banks and credit unions that cannot afford to cut fees like bigger banks.

Visa and MasterCard officials warned the legislation could lead to higher costs for consumers.

"This proposed legislation would replace a competitive, free market system with price controls," Joshua Floum, Visa's general counsel, told a hearing held by the House Judiciary Committee's antitrust task force.

"These smaller institutions rely on interchange to keep their card programs running," Floum said.

Joshua Peirez, chief payment system integrity officer at MasterCard Worldwide, pointed to a study in Australia that showed government regulation resulted in higher annual fees for consumers because merchants did not pass on the savings.

"The merchants benefited from reduced costs of accepting cards while consumers paid the price," Peirez said.

Conyers defended the bill, saying, "We do not think this is regulation of the industry."

Retailers such as grocery and drug stores complain that Visa and MasterCard set non-negotiable fees for transactions and the system lacks transparency.

One operator of gasoline stations and convenience stores told the House panel that initial public stock offerings by Visa in March and by MasterCard in 2006 did little to foster competition.

"The situation is just as bad," Tom Robinson, a member of the National Association of Convenience Stores, told the panel. "The same banks continue to agree to charge the same interchange fees and refuse to compete."

A consumer group, the U.S. Public Interest Research Group, said it supports legislation because it would create a mechanism pressuring both merchants and the credit card companies to negotiate fees.

"The panel (would) not set prices or establish government price controls," said Edmund Mierzwinski, consumer program director at U.S. PIRG. "It is an oligopolistic market in which a small set of cardholders dominate the market and establish a set of deceptive practices."

The bill has little chance of becoming law this year due to Republican opposition and the dwindling number of congressional work days left before the November election.

Conyers's bill would apply only to the dominant electronic payment companies -- Visa and MasterCard.

(Reporting by John Poirier; editing by John Wallace)