Interchange Updates: Canada, EU, and the US

All's Quiet on the American Front in the interchange wars.  But there has been some action to report in Canada and the EU. In Canada, the federal Competition Tribunal dismissed the suit brought by the Canadian antitrust authority against Visa and MasterCard. Only a summary of the decision is available--the ruling is under seal.  According to the official summary, the dismissal was on the grounds that the statutory provision in question required a resale, which had not been established by the Commissioner of Competition.

But the Competition Tribunal went on to explain that in the event it was wrong about its statutory analysis, "there had been an adverse effect on competition" from no-surcharge rules. (My emphasis.) Nonetheless, the Competition Tribunal found that the proper solution to the antitrust problem is a regulatory framework, not an injunction.

So while this was a victory for MasterCard and Visa, it was a victory on technical grounds. The Canadian Competition Tribunal was clear that no-surcharge rules are anti-competitive. It'll be interesting to see if Canadian regulators or Parliament take up the implicit invitation to create a regulatory framework as we did for debit cards with the Durbin Amendment. 

That brings us to the EU. The EU Commission proposed just such a regulatory framework, with fee caps on both debit and credit interchange fees. I have no idea whether this proposal will actually become law in the EU.  

And finally there is one small item cooking on the domestic front. There's a suit pending in federal district court in the Southern District of New York challenging the New York no-surcharge statute on First Amendment grounds. The argument is that a surcharge and a discount are mathematically interchangeable, but New York by permitting discounts, but not surcharges is regulating merchants' speech. To my disappointment, the New York Attorney General has decided to defend the statute. 

The New York suit was brought by public interest lawyer Deepak Gupta, and consumer groups have weighed in with supportive amicus briefs. Slowly, but surely US consumer groups seem to be understanding that interchange fees are really a hidden tax on consumers. While reducing interchange fees may result in banks trying to raise other fees, if those other fees are more transparent, the total paid by consumers should be lower. Indeed, that seems to be exactly what happened when BoA tried to raise checking account fees after the Durbin Amendment. The checking account fees were more transparent, and BoA lost a lot of accounts to credit unions and community banks. 

Which brings us back to Canada. Apparently the Canadian consumer groups haven't gotten the memo. Brian Cran, head of the Consumers' Association of Canada responded to the Canadian interchange ruling by saying:

I’m ecstatic. We get to keep our credit cards the way they are. We keep our reward cards. We keep our extended warranties. We keep our delivery guarantees. We keep our fraud guarantees.

Apparently, Mr. Cran doesn't understand that none of these things are free. Canadian consumers are already paying for them, but because they are being charged indirectly, these charges are surely inflated because there is no competitive pressure pushing them down.

As it is, all of these wonderful features that Mr. Cran wants preserved are really bad deals for consumers:

• The cost of operating rewards programs is at most 45% of interchange fees, and the actual rewards received are of less value. And for many cards, even premium cards, the rewards value is an even smaller percentage of interchange. One very large US prime portfolio I've seen was at about 20%. 
• I don't know how many people actually use credit card extended warranties, but I suspect it is very few. I also suspect that almost nobody would purchase this sort of insurance as a free-standing product. 
• I'm not sure what Mr. Cran means by delivery guarantee--perhaps that if you don't get the goods, you get a refund? I assume that's a function of Canadian law, not card network rules. 
• Finally, fraud guarantees are of little value:  Canadian law, like US law, caps liability at $50 on credit cards. The zero liability policies of the major card networks don't really add much because issuers aren't likely to litigate with a consumer over $50 or shut an account over a single dispute, and the policies may not be enforceable anyhow because of a lack of contractual privity. 

Hopefully the Canadian consumer groups will talk to their American counterparts a bit about what US consumer groups (and I'm not talking about the astroturf groups the card industry has created) have learned about interchange over the past decade.