Reading that headline, you might think this is another article about the Obama-McCain race, but it's not, although the outcome of that contest does have relevance for the subject matter of this article.
I am referring to the recent moves by Congressmen and Senators to focus attention on the issue of interchange. As an industry participant, you may well ask "What issue?" and that's the point. For most of us in the acquiring business, interchange is no issue at all. We get the numbers from Visa and MasterCard and we send them on to the merchant, and that's that. We don't have any say in how much interchange is or what it's used for. It just is what it is. For us, worrying about interchange is wasted energy.
So much for the acquiring view. Apparently, Congressman John Conyers (D-Michigan) and Senator Richard Durbin (D- Illinois) see interchange as an "issue". That's Washington code for "something that needs to be investigated because a noticeable number of my donors and/or constituents don't like it." An issue is something that comes to the attention of a Congressman or Senator which appears to have a chance of attracting public attention, and of course, makes the Congressman or Senator look good to voters.
That makes interchange an issue. Why? Because the National Association of Convenience stores says it is, that's why. It's an issue for them because they don't want to pay it anymore. That's simple enough.
Visa and MasterCard appear to be on the defensive on this issue to me. Their responses so far range from incredulity that anyone would ask about interchange to complete silence. Neither one of those is going to help their cause much. They need to build the case for interchange - whatever it is. So far, it looks like the retailers are scoring the points.
Rep. Conyers introduced HR 5546 also known as the "Credit Card Fair Fee Act of 2008" back in March. The bill got a hearing but appeared to be going nowhere. Then, Senator Richard Durbin decided to take the matter up and introduced SR 3086 with substantially the same language and provisions.
Now, there's a Congressman AND a Senator looking into interchange. That suggests to me that something is happening - Washington is waking up to interchange and what it means. That's both good and bad.
On the good side, if the Congress investigates interchange, they're going to realize that many banks depend on it for their profits and that a major reduction in interchange rates will have a decidedly negative effect on the capital structure of many, especially smaller banks and issuers. Private monocline issuers simply won't make it.
ake Advanta for example — a fine company, (NASDQ: ADVNA). They issue credit cards to small businesses and sell off the receivables. In their 2007 Annual Report Advanta reported $199,519,000 in interchange income. Advanta had pre tax income of $115,680,000. That means fully 172% of Advanta's net income came from interchange in 2007. Take away interchange, and this company would have lost $84 million in 2007. Yikes.
I am not picking on Advanta — they are a great company run by great people. But they're a perfect illustration of how the issuing world depends on interchange. That means acquiring depends on it, too. Without issuing working well, there's no acquiring to be done. So we're symbiotically attached to one another.
The bad news here is that Congress operates by another yardstick. While they're concerned about any damage their decisions might have on business, they're more interested in numbers of voters. ThereÕ' always a reckless element to congressional interference in the free market — call it collateral damage. If the Congress gets involved in our business, anything can happen. It wouldn't take much for Congress to accidentally damage or eliminate the ISO space in the market for example. Mainly because they dont know 'e exist — and may not care. I submitted testimony to both chambers to educate lawmakers about the existence of ISOs and their legitimate place in the market just so lawmakers and their staffs would be aware of our existence and sensitive to our concerns.
ISOs employ tens of thousands of people and serve an important function in the marketplace. They keep the free market free and provide merchants with service and price choices that did not exist before they arrived about 20 years ago. My data collected over the years shows that the eventual price point the merchant is paying for processing and support services has gone down steadily through competitive action in the market. ISOs did that.
Congress will be looking into our affairs over the coming years. What they will do is anyone's guess right now. Perhaps the industry will be smart enough to solve its problems on its own. If not, get ready for some change. I think a McCain Presidency would be more lasse faire on this issue, while an Obama Presidency strikes me as more activist. There's a lot of uncertainty on this issue. But scrutiny appears to be here to stay and depending on the mood in Washington in 2009, some real change could be coming. Stay tuned! 
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