Below is the article By Linette Lopez Business Insider.com

Why exactly we haven’t heard of this before, we’re not sure. Forbes conjectures that it could be because not a lot of banks have credit card company analysts.
Regardless, Dan Freed reports that 5 million retailers are suing credit card companies,Visa and Mastercard, and major banks — JP Morgan, Bank of America, Sun Trust, Wells Fargo, PNC Bank, Citigroup, HSBC, Barclays, 5th Third Bancorp, and US Bancorp — for potentially billions.

Right now the parties are in settlement talks, and it seems like it isn’t going the defendants way. Mastercard said in its latest filing that the plaintiffs ‘demands “remain unacceptable” given the size of the monetary demands and “unacceptable changes to MasterCard’s business practices.”

That unacceptable number could be about $40 billion a year from 2004 to now.

Here’s what the case is all about:

The retailers (Payless Shoestore, for one) “argue banks’ decision to spin off MasterCard and Visa through initial public offerings in 2006 and 2008 was a disingenuous effort to avoid the appearance of a monopoly. It seeks compensation for alleged overcharges “for the fullest time period permitted,” by statutes of limitations and the Wal-Mart settlement (thought to be 2004). The claim also requests defendants be found in violation of antitrust laws and barred from violating those laws in the future.”
Basically, the retailers say the banks and the credit card companies colluded to make prices higher than they should be and screw them. That’s the nutshell.
What isn’t so cut and dry is what everyone will have to pay. Estimate range from the single to double digit billions. One thing’s pretty clear though, banks could get slammed hard.
Think of it this way. The Durbin amendment (legislation curbing debit/credit card fees) cost BofA $1.9 billion. One Deutsche analyst estimates this could cost the bank $3.68 million. JP Morgan could get hit with a $5.38 billion settlement, and Durbin cost it $1 billion.

It all depends, however, on how much the total settlement is. Some banks have been preparing for it, as for others, we’re not so sure.

From Forbes:
Bank of America states in its 2010 10-K that it would have to pay 11.6% “of the monetary portion of any comprehensive Interchange settlement.
Citigroup also mentions the issue in its 10-K, noting that “as of December 31, 2010, Citigroup carried a reserve of $254 million related to certain of Visa USA’s and MasterCard’s litigation matters.”
JPMorgan’s 10-K gives no specific numbers regarding its exposure, but notes that, “based on publicly available estimates, Visa and MasterCard branded payment cards generated approximately $40 billion of interchange fees industry-wide in 2009.

Purdue University economics professor John Connor that looked at 700 cartels going back to the 1600s found a median overcharge rate of 25.5%. But even if one assumes an overcharge of just 10% — the figure used by the Justice Department in its antitrust cases — that would suggest $32 billion of overcharges over eight years. That number, however, would be trebled, as is the rule in antitrust cases, meaning damages could conservatively be estimated at $96 billion. If Bank of America had to pay roughly 10% of that, as per its 10-K, the bank would have to cough up $9.6 billion.

Our government – with the passage by Congress of the Durbin Act on October 1st – came up with a game plan to help merchants hold onto their profits, while at the same time penalizing the banks. The Durbin Act caps interchange fees, which are what financial institutions can charge merchants for running purchases made with debit or credit cards.

Legislation like this might make some feel good: It’s about time the government protects the everyday Joe and puts the big banks in their place!

The only problem is, there is a severe flaw in the plan touted, as many merchants never actually see the reduction in fees as the banks are able to simply keep them anyway.
The plan was to make a law forcing Visa and MasterCard to lower their debit interchange fees. These fees are collected from creditors (“merchants”), and are kept by the banks that issue the credit cards used in purchases.

On the surface, this means banks will lose millions in income from the reduced interchange fees. But not so fast!

The law only states that the interchange fee has to be lowered to the processor. There’s nothing in the amendment that states the processor has to pass the savings on to the merchant. Keep in mind the largest market share of processing is done by banks, so the money just left the credit card issuing side of the bank only to be put back to the credit card processing side of the bank.

You might say this was just a mistake, an oversight! But if you consider that Senators and Congressman only get paid $174,000 a year to vote on behalf of small to midsized businesses, yet when they sit on the Financial Services Committee (or what the Huffington Post refers to as the Cash Committee) they receive millions per year – in the form of campaign contributions – to vote in the interest of the big banks.

According to openSecrets.org the Finance/Insurance/Real Estate industry paid just under $10 million to the Financial Services Committee to vote for their interests. And if the big campaign contributions weren’t enough, the commercial banks have over 400 lobbyists wining and dining the Financial Service Committee to ensure votes go their way. So the question remains, is this a “cover up” or a “screw up?”

If you’ve ever seen the movie Oceans 11, you might remember the scene where George Clooney gets beat up by this big guy brought in by the bad guys to rough him up. The catch is, George was ready for him because he had already bought him off! The big guy was – unbeknowst to the bad guys – on George’s payroll so all he had to do was make it look like he was getting the beating of a lifetime! After all, the casino owner was not happy and wanted justice, just like the American people today. They are angry that, while common everyday working people are losing their jobs, homes etc., big bank CEO’s are making tens of millions of dollars a year in bonuses from taxpayers’ bailout money. They want retribution; they want the banks to hurt too, they want the government to step up and put the banks in their place! So did they? Or is this just all an act to pacify the people.

Let’s recap…

The amendment says the banks will get a lower interchange fee, causing them to lose millions
The amendment allows the banks to not have to pass the savings on to the merchant allowing them to keeping the very profits they lost!
Basically, the banks won’t lose one dime! (Other than the millions they pay out in campaign contributions and to lobbyists!)

So, is it worth your time to investigate if your processor is pocketing the difference?

If your invoices are average just $300, let’s say, the new fees would only be 27 cents versus $3.30. If you are accepting credit cards for 300 such transactions a month, not getting the new debit pricing would cost you over $900 a month or just under $11,000 a year.

Here’s a quick estimator: the new fees should save you $1.00 for every $100 processed.

What can you do?

Get with your credit card processor and have them show you on your statements where they are passing these savings back to you.

The old debit pricing was:

Swiped Visa debit .95% with a $0.20 Transaction Fee. If keyed, the rate goes to 1.60%
Swiped MasterCard debit 1.05% and $0.15 Transaction Fee. If keyed, the rate goes to 1.64%
Pin entered debit prices varies by Pin Network with an average of $0.50 total transaction cost

The new debit pricing:

.05% with a $0.21 – $0.22 transaction fee

Note: This amendment only applies to Debit Cards issued by banks with over 10 Billion in assets. It excludes Debit Cards issued by little home town banks and or Credit Unions which make up a very small market share.

• AIG sues Bank of America

• Fifth Third might face action by SEC

• Wells Fargo to pay $590 million settlement

And these headlines are just from yesterday!… not to mention last month or the last few years or the massive lawsuits recently filed against the processing networks.

When a business that obtains its profits from the manufacturing of a product is sued, they have no choice but to absorb the loss or find a new & improved product allowing them to make higher revenues. After all, they can’t raise their existing product costs by double what it was yesterday. But, what if that company was run like a bank or processing network? Their CEO’s wouldn’t have to take a hit or come up with a new improved anything. They would just raise their fees that you HAVE to pay!

Keep in mind, even in the banking world, banks can’t just charge anything they want for most of their services. If their loan rates, checking account fees, etc. are too high, people will just get their loans somewhere else.  So how will they make up those losses? In hidden fees! You can’t defend yourself against what you can’t see.

No one ever says to the bank, I’m moving my banking relationship because you’re surcharging the surcharges on my downgrades, or I’m not getting back my debit interchange discounts….blah, blah, blah. What does all that even mean? Exactly my point! How can you defend yourself against an overcomplicated system full of hidden fees and acronyms that have no value to the everyday merchant? And worse yet, UNREGULATED! Unlike your car loan or other banking products, they can charge anything they want and add in and change fees at any time.

If your loan rate is too high, no problem, just get it somewhere else. However, merchant processing fees are not that simple. They are unregulated and anything goes, giving free reign to Credit Card Processors/Banks to charge anything they want and add in endless hidden fees.

Banks have two choices: add costs to things like car loans that you can see and shop, or add more hidden fees that you can’t see or shop around. Where do you think they will add their fees?

This is where Merchant Relief Council comes in. We know how to spot the hidden fees! And the best part is, it costs you nothing to have us perform an audit. You might think you have a great deal, but remember, there is a reason they’re call HIDDEN FEES! Don’t take chances, call MRC TODAY!

With over 95% of merchants being over billed on their merchant processing accounts, we decided to make sure we armed you with everything you need to level the playing field.

Our new site has lots of do-it-yourself tools and information such as:

• Top 5 indicators you’re being cheated
• Lowest Price and other billing scams (see the insider tricks)
• New Instant Analysis (find out how much they are taking in under 3 minutes, with total anonymity)
  And much, much more

If you think you’ve had an audit done, you should check out the “Audit vs. Analysis” section. You will be very surprised at what you received versus what you thought you received. And if you think you are getting a good deal and you’re in that 5%, then put your processor to the test and ask them these 5 Questions.

Remember, Credit Card Processors work to protect their profits and represent the best interest of their stockholders, the more you pay, the better. That’s their job!

We work on your behalf; we protect your profits and represent your interest. The less you pay, the better. That’s our job.

We hope you enjoy the new format and all the information. Check it out for yourself and let us know what you think!

TO:

Dear Mr. Dimon:

In your recent annual letter to your company’s shareholders, you wrote a lengthy and dismissive critique of the debit interchange fee reform legislation that I drafted and that Congress enacted last year. You have also been quoted describing my amendment as “counterproductive,” “price fixing at its worst,” and “downright idiotic.” I am compelled to respond, and I ask that you share this response with your shareholders as well as your customers.

Clearly, debit interchange reform has displeased many in the financial services industry. Your industry is used to getting its way with many members of Congress and with your regulators, and my amendment and the Federal Reserve’s draft regulations were not written the way you wanted. But that does not mean they were written poorly or that the process that created them was flawed. To the contrary, interchange reform will carefully but firmly rein in the fee collusion that your bank and thousands of other banks currently engage in through Visa and MasterCard. The wisdom of this reform is confirmed by the irrationality of the arguments that your industry raises against it – arguments that are based upon misrepresentations and threats rather than evidence or logic.

The American people deserve to know the real story about the interchange fee system and the ways that banks in general – and Chase in particular – have abused that system. I have said and written much on this topic already, but I will respond to five of your specific criticisms below.

1. Your letter claims that my reform amendment “is an example of a policy that has little basis in fact or analysis.” In fact, the amendment was drafted based upon years of Congressional hearings, Government Accountability Office reports, academic articles, and published studies by the Federal Reserve’s economists and payment system experts. These analyses showed that the debit interchange system is uncompetitive, inefficient, and harmful to consumers. Your industry often acts like these analyses do not exist, so I will explain what they reveal.

The debit interchange system is not a properly functioning market. For years, card-issuing banks like Chase have agreed to let the Visa and MasterCard duopoly fix the interchange fee rates that banks receive from merchants each time a debit card is swiped. The banks get the fees but they do not set the fees. This system of price-fixing by Visa and MasterCard on behalf of thousands of banks has gone entirely unregulated.

There are two core problems with Visa and MasterCard’s fixing of interchange rates. First, centralized rate-fixing does not give card-issuing banks incentive to manage their operational and fraud costs efficiently. This is because all banks in the network are guaranteed the same network-fixed interchange rate whether they are efficient or inefficient. Competition is absent and inefficiency is subsidized when fees are set in this manner.

Second, Visa and MasterCard have incentive to constantly increase interchange rates and there is no countervailing market force to temper these fee increases. Visa and MasterCard want as many of their debit cards to be swiped as possible because they are paid a network fee by merchants each time a card is swiped. By raising interchange rates, Visa and MasterCard can entice banks to issue more of their cards. Because Visa and MasterCard have enormous market power and control around 80 percent of the debit cards in consumers’ wallets, merchants cannot realistically say no to accepting Visa and MasterCard and have no leverage to negotiate fee rates with them. There is no naturally-occurring market force in today’s interchange system that would ever lead rates to go down.

So merchants are stuck with ever-rising debit interchange fees that add up to more than $16 billion each year. These fees not only affect merchants, but also universities, charities, government agencies and all others who accepts debit cards as payment. The fees end up getting passed on to consumers in the form of higher retail prices for groceries and gas. Consumers, and particularly unbanked consumers, ultimately bear the cost of subsidizing the interchange system.

We owe it to our nation’s consumers and businesses to ensure that the interchange system is efficient, transparent, and subject to competitive market forces. Studies have shown that Americans pay the highest debit interchange rates in the world, and that these rates have continued to increase in recent years. The Federal Reserve has also found that the high interchange rates charged today far exceed what it actually costs to conduct a debit transaction. Nearly every other industrialized country has established reasonable regulation over their debit systems, and these countries have achieved improved efficiency, lower fraud, and consumer benefits. The time has come for reasonable reform of the dysfunctional U.S. debit interchange system, and my amendment will make that reform a reality.

2. You say that “it’s a terrible mistake and also bad policy for the government to get involved in price fixing.” Of course, my amendment does not create price fixing – it constrains the price fixing that Visa and MasterCard currently perform on banks’ behalf. Visa and MasterCard cannot simply be trusted to fix interchange prices in a way that is fair for all participants in the debit card system. They have not proven worthy of that trust.

Last year Congress decided that there should be reasonable regulatory constraints placed on Visa and MasterCard to ensure that they cannot use their market dominance to funnel excessive interchange fees to the nation’s biggest banks. A strong bipartisan majority supported my amendment, which said that if Visa and MasterCard are going to fix fee rates on behalf of banks with over $10 billion in assets, those rates must be reasonable and proportional to the cost of processing the transaction. It is important to make clear that if Chase wants to set and charge its own fees in a competitive market environment, the amendment does not regulate those fees. The only regulated fees are those fees that banks let card networks fix on their behalf.

3. You criticize the law Congress passed because it does not consider “the cost of fraud.” Your comment highlights how the current interchange system, which supposedly does consider the cost of fraud, creates exactly the wrong incentives when it comes to fraud prevention. Fraud rates are far lower for PIN debit transactions than for signature debit transactions, but Visa and MasterCard set higher interchange fees for signature debit than for PIN ostensibly to cover the higher cost of fraud. Banks now urge cardholders to pay with signature in order to get the higher fees. For example, on April 21, 2010, the American Banker reported that your own bank sent a mailing to your debit customers that strongly suggested they should “always select” signature.

Chase’s practice of steering American cardholders toward fraud-prone signature debit stands in stark contrast to Chase’s practices in Canada. The Chase Canada website indicates that “chip and PIN technology will become available for all Chase Canada MasterCard and Visa cards in 2011.” Your Canadian-based subsidiary Chase Paymentech Solutions says on its website that chip and PIN technology provides “Enhanced Security and Fraud Reduction – Chip technology is virtually impossible to copy and combining its use with a PIN helps reduce lost, stolen or counterfeit transactions.” It is frankly inexcusable that your bank would urge your American customers to “always select” a fraud-prone technology while you provide your Canadian customers with technology that enhances security and reduces fraud.

In contrast to the current U.S. interchange system which rewards banks for promoting fraud-prone signature debit, my amendment will allow interchange fee increases only to those banks that successfully prevent fraud. The Federal Reserve can implement this in its final rulemaking by setting target fraud prevention metrics and allowing increased interchange for banks that meet those targets.

4. You say that Chase needs debit interchange fees to pay for the “fixed costs of servicing checking accounts and debit cards” such as “printing and mailing of the cards,” “operational and call center support to service the cards,” and “the costs of ATMs and branches.” Here you are using the old financial industry trick of first conflating the cost of conducting debit card transactions with the cost of offering other checking account-related services, and then arguing that network-fixed debit interchange rates should be used to cover this whole basket of costs. It is a clever argument that aims to justify Visa’s and MasterCard’s exorbitant price-fixed rates, but the shortcomings of this argument are evident.

The costs you cite in your letter are costs which banks should be incentivized to manage efficiently, and allowing Visa to fix interchange fee rates across all its member banks to supposedly cover these costs is a recipe for inefficiency and excess. Card network companies like Visa are not positioned to know what the appropriate level of cost is for operating “ATMs and branches,” nor are they equipped to determine how much of a particular bank’s “printing,” “mailing,” “operational” and “call center” costs are attributable to debit cards instead of ATM cards or credit cards. Further, Visa has no way of knowing if a particular bank is using debit interchange revenue not to cover legitimate costs but instead for rewards, ads, profit, or executive bonuses. Indeed, because Visa itself profits by incentivizing banks to issue more and more of its cards, Visa has every incentive to inflate the interchange fees it fixes to levels that compensate banks far in excess of their costs. In order to correct these incentives for inefficiency and excess, my amendment limits network interchange price-fixing on behalf of the biggest banks to an amount that is reasonable and proportional to the costs that are necessary to authorize, clear and settle a particular debit transaction over the network’s wires.

Also, your claim that interchange fees must be high enough to cover all checking account-related costs is undermined by the fact that banks also charge many other high consumer fees under the premise of covering those exact same costs. Banks like Chase charge consumers many fees for maintaining and accessing funds in their checking accounts – monthly fees, overdraft fees, failed payment fees, ATM withdrawal fees, failure to maintain a minimum balance fees, account closing fees, and more. Bank revenues from these consumer fees have not gone down in recent years as interchange fee revenues have gone up; to the contrary, bank revenues from consumer fees have also reached record highs. I would draw your attention to the November 12, 2008, Wall Street Journal article entitled “Banks Boost Customer Fees to Record Highs” and the July 1, 2009, New York Times article entitled “Bank Fees Rise as Lenders Try to Offset Losses,” both of which discuss your bank and other banks’ efforts to raise consumer fees long before my amendment was ever written.

5. You say that the amendment “potentially will harm consumers” because “banks will be forced to lose money on debit interchange transactions and likely will compensate by increasing fees in some way for deposit customers.” This threat defies both facts and logic.

First, there is no evidence that banks cannot continue to offer debit cards profitably with reduced interchange. As Andrew Martin explained in the excellent January 4, 2010, New York Times article entitled “How Visa, Using Card Fees, Dominates a Market,” up through the early 1990s banks used to offer debit cards even though they received no interchange fees. In fact, many banks used to pay merchants for accepting debit cards, because debit cards saved money for banks when compared to the banks’ costs of processing paper checks. The current high-fee debit interchange system in this country only developed because Visa entered into and took over the debit market the mid-1990s through an antitrust violation, and Visa then imported credit card-type interchange fees into the debit space. Studies have shown that many other countries enjoy vibrant debit systems with interchange fees strictly regulated or prohibited entirely. In short, past experience in this country and present examples in other countries demonstrate that banks like Chase can easily continue to offer debit card services without the excessive subsidy of high interchange fees.

Second, if Chase follows through on threats to increase consumer fees (beyond those increases you have already made in recent years), market competition would suggest that many of your deposit customers would take their business elsewhere. In fact, many of those customers would likely take their business to the small banks and credit unions who are exempted from my amendment’s interchange fee regulation and for whom Visa and other debit networks have already agreed to set a higher tier of interchange rates. And for those who continue to speculate that my amendment will hurt small banks and credit unions, I recommend they read Simon Johnson’s excellent analysis in the April 7 New York Times entitled “Big Banks Have a Powerful New Opponent.”

In conclusion, I recognize that Chase will likely see decreased revenue from interchange reform, but I urge you to keep some perspective. Last year Chase had $17.4 billion in profits – up 48 percent from the previous year – and a 15 percent profit margin. Your own personal compensation “jumped nearly 1,500 percent to $20.8 million in 2010” according to Reuters. In contrast, middle-class American families are struggling to get by in a tough economy – an economy that went south because of the banking industry’s unregulated excesses.

There is no need for you to threaten your customers with higher fees when you and your bank are already making money hand-over-fist. And there is no need to make such threats in response to reform that simply tries to spare consumers from bearing the cost of interchange fees that are anticompetitive and unreasonably high.

Interchange reform is necessary and it is long overdue. Right now the Fed is working diligently to craft a set of final regulations that will reflect the comprehensive information it has gathered and that will respond to the valuable comments it has received. In the coming weeks I am confident the Fed will produce a reasonable set of reforms that will enhance the efficiency, competitiveness and fairness of the debit system. This will neither be “counterproductive” nor “idiotic.” It will be good news for all Americans.

Sincerely,

Who's fear? Yours or the Banks

Michael Gerber Show

I just got back from Orlando where I was a guest on the debuting Michael Gerber show.

It’s been a crazy first quarter and I apologize for falling behind on this blog. But I’ll be returning soon with some great info. There’s so much going on right now with the new laws getting passed… and WOW the banks are not happy at all. This is a great sign! Just keep in mind, they have vowed to get their profits from somewhere, and have stated the government is not going to tell them what to do. It’s getting pretty interesting. If you haven’t already, I encourage you to follow me on Twitter. While I don’t always have time to blog, I always tweet with links to great banking articles worth reading.

Just a couple more quick but exciting updates:  I will be heading out Monday for my first TV interview on the Michael Gerber Show which debuts mid-May on CBS, ABC, NBC and Fox….. Stay tuned for more to come on that!

And my book The Great American Heist, which has been delayed, is finally coming to market this fall. Whew… that’s been an uphill battle! I guess not “everyone” is as excited about it’s release as me and my merchant friends are (if you know what I mean!).

Robert

Our new ad campaign boils it down to a simple truth:

Credit Card Processors work to protect their profits and represent the best interest of their stockholders. The more you pay, the better. That’s their job.

Merchant Relief Council works on behalf of the merchant. We protect your profits and represent your interests.The less you pay, the better. That’s our job.

This is reality. But hey, I’m probably not telling you anything new. I mean, who really thinks their processor has a meeting on how to cut their costs? We all know that when bosses say “we have a new pay plan and you’re going to love it” they didn’t actually sit down and discuss how to pay you more, they sat down to figure out how they can make more! 

And one more slice of reality for you: getting a processor to give a fair deal is the easy part. Everyone complies when confronted with the wrong they have done. You’ll apologize to a police officer when they pull you over and then after he lets you go, turn around and drive even a little faster so you can make up for that lost time.

Funny how life is the same in so many areas. Just like the speeder goes faster to make up for his lost time, the processor looks for ways to make up for their lost revenue.

Credit Card processors have mastered their end game, which is to make so many changes and make it so confusing that you become so worn down that you give up and just leave it alone. You’re tired of the fight, tired of changing to just end up back in the same spot, or worse. You begin to think you’re better off to lose, than fight so hard and just end up losing anyway.

But, IT DOES NOT HAVE TO END THAT WAY! Get MRC in the fight or at the very least, take the tools and education we have given you and fight the processors on your own. Either way, this much is for sure…. it’s no longer a one-sided fight and you’re no longer alone.   

I wish you and your loved ones the very best Holiday, rather it be Merry Christmas or Happy Hanukkah, what an awesome time of celebration!

Let’s bring in the New Year with a new outlook on all the good to come in 2011

-Robert