Issue Brief September 2012

Credit/ Interchange and State Procurement

Introduction Background

In this issue brief, NASPO addresses the potential impacts P-Cards (purchasing cards or procurement cards) are credit on state procurements of an issue that has received sub- cards used by state governments, issued by a bank or major stantial public attention – the antitrust lawsuit: In re Payment provider, with a generally pre-established credit Card Interchange & Merchant Discount Antitrust Litiga- limit. The cards enable e-Procurement and facilitate on-line tion (1:05-md-01720-JG-JO). This lawsuit alleges, among ordering, frequently from pre-approved suppliers under blan- other things, that credit card issuers unlawfully fixed inter- ket contracts. Benefits to the enterprise include expedited change fees and engaged in other conduct in violation of procurement of small dollar value commodities and services Section 1 of the Sherman Antitrust Act. The class action liti- and reduced costs of transaction processing. gation that dates to 2005 is pending in the US District Court for the Eastern District of NY. On July 13, 2012, a settlement Interchange fees are fees that a merchant’s bank pays a was reached between retailers, payment card networks, and customer’s bank (the “card-issuing bank”). The fees are de- major card issuers over interchange fees and rules. This pa- ducted by the card-issuing bank from the amount submitted per will: by the merchant’s bank, the latter of which handles the credit or debit card transaction for a merchant. The merchant re- • Review recent reforms to interchange fees; ceives from its bank the amount of the transaction minus the interchange fee, and an additional (usually smaller) fee or • Discuss potential implications for state governme- merchant discount rate. The interchange fee averages ap- nts’ procurement card programs, associated with the proximately 2% of transaction value. Interchange fees are terms of the proposed settlement agreed between pay- set by the credit card networks and have a complex pricing ment card networks and merchants; and structure, which is based on the card brand, regions or ju- risdictions, the type of credit or debit card, the type and size • Identify key areas for procurement officials to cons- of the accepting merchant, and the type of transaction (e.g. ider, in order to guide potential adjustments to state online, in-store, phone order, whether the card is present for procurement card programs and accommodate ex- the transaction, etc.). They are typically a flat fee a per- pected changes in the industry. centage of the total purchase price (including taxes).

Credit/Debit Card Interchange NASPO Staff Contact: Fees And State Procurement Elena Moreland Senior Policy Analyst [email protected] (859) 514-9159 September 2012 The Dodd-Frank Wall Street Reform and Consumer Protec- Another issue that has received public attention is the in- tion Act (H.R. 4173, signed into law by President Obama terchange fees for credit cards (as opposed to debit cards, on July 21, 2010) included provisions known as the “Durbin which are the subject of the aforementioned legislation). Amendment” giving the Federal Reserve the power to regu- Visa and MasterCard set fee schedules centrally, with all late interchange fees for debit cards; it also allowed retail- other card issuers charging the same fees, instead of com- ers to refuse to use cards for small purchases and offer in- peting over fees. By doing this, it has been alleged that they centives for using cash or another type of card. Prior to this are engaging in unlawful practices, according to claims by legislation, debit card interchange fees were set at around the class of US retailers in the five-year long Federal multi- 1% to 5% of the sale amount. The Amendment has reduced district interchange antitrust lawsuit. these fees by a considerable margin.

A proposed settlement in the long-term class action lawsuit is currently pending a federal judge approval; if approved, it would be the largest antitrust settlement, including the following terms that might impact consumers by early or mid- 2013 when the rules and changes would occur:

• The creation of a fund of up to $7.25 billion to settle allegations that Visa, MasterCard, and large banks conspired to restrain competition by controlling interchange fees.

• Reduced interchange rates for eight months. The eight-month period for the reduction would begin within 60 days after completion of the court-ordered period, during which time individual class members may opt out of the settle- ment.

• Modifications to Visa and MasterCard merchant rules to allow retailers to charge customers a checkout fee (mer- chant surcharge) at the register; there is a cap on the checkout fee, limiting it to cost of acceptance. The surcharge is applicable to all merchants where permitted by state law.

• The settlement requires notice and disclosure to the consumer at point of entry, point of sale and on the receipt.

• The settlement includes provisions protecting Visa and MasterCard from future challenges over similar swipe-fee issues going forward; the court will certify an “injunctive class” setting forth “go forward rules”—no merchant may opt out of this class.

• The settlement gives merchants the right to negotiate interchange rates collectively. “Properly formed” merchant buying groups can meet with networks to enter into commercially reasonable deals in their discretion and business judgment.

State P-Card Programs and Rebates Table 1. States that have a purchasing card program Statistics from the 2011-12 NASPO Survey of State Procure- Source: 2011-12 NASPO Survey of State ment Practices show that of the forty-six states that have a Procurement Practices P-Card program (see Table 1), all but one receive a rebate or State Response/ Responding States (48) other monetary benefit from the issuing bank for the state’s Count use of the P-Card. Yes 46 AK,AR,AZ,CA,CO,CT,DC,DE,FL, GA, HI,IA,ID,IN,KS,KY,LA,MA,MD,ME,MI, States’ comments and a self-reported description of the re- MN,MO,MS,MT,NC,ND,NE,NJ,NV,NY, bate structures in thirty-seven state P-Card programs are OH,OK,OR,PA,SC,SD,TN,TX,UT,VA, shown in Table 2. The rebate structure is typically somewhat VT,WA,WI, WV,WY complex, based upon a combination of the following compo- nents that drive rebate: total dollar volume of transactions, average transaction volume, and speed of payment. No 2 AL,NH

Credit/Debit Card Interchange NASPO Staff Contact: Fees And State Procurement Elena Moreland Senior Policy Analyst [email protected] (859) 514-9159 2 September 2012 Table 2. Fee/rebate structure of states’ purchasing card programs Source: 2011-12 NASPO Survey of State Procurement Practices

Responding States and Comments (37)

AK % of overall volume

AR Three components drive rebate: Volume, Tran size, how quickly payment (File Turn).

CA See: http://www.dgs.ca.gov/pd/Programs/CALCard.aspx then expand “Program Information” the click on “Contract - MSA 5-06-99-01 (MS Word)” and see Exhibit F.

CO Aggregated agency volume percent rebates are part of the contract.

CT See contract link, very complex.

DC Productivity plus prompt payment

DE Delaware leverages an aggregated volume rebate in conjunction with a speed to pay rebate structure for this award.

FL The State of Florida receives 100 basis points which equates to 1% of the transaction.

GA • Based on their annual volume, local entities will receive a rebate • Minimum annual spend of $20,000 required for rebate; State retains local rebates less than $100 • Tiers based on annual spend on the cards • Less than $20,000 = no rebate • $20,000 – $1 million = 50 basis points (.0050) • $1 – $2.99 million = 100 bps (.0100) • $3 – $7.99 million = 110 bps (.0110) • $8 million or greater = 140 bps (.0140) • Distributed annually (following the end of the State’s fiscal year – FY ends June 30) • Began July 1, 2009

HI 1.4% of total net transactions

IA Based on basis points and volume of annual purchases

ID Rebate % based on volume of net purchases ranging from .25% to .85%

IN Tier structure based on spend 4% currently

KS Payment within 30 days, 143-147 basis points Speed of Pay - Accelerated pay increased by .131% for 20 days and .245% for 10 days

LA $0-$50MM - 75 basis points, $50-$100MM - 85 basis points, $100MM+ - 95 basis points

MD P-Card is handled by the State Treasurer

Credit/Debit Card Interchange NASPO Staff Contact: Fees And State Procurement Elena Moreland Senior Policy Analyst [email protected] (859) 514-9159 3 September 2012 Table 2. Fee/rebate structure of states’ purchasing card programs Source: 2011-12 NASPO Survey of State Procurement Practices

Responding States and Comments (37)

ME The rebate structure is based upon total dollar volume usage of the program, and the promptness with which the State’s monthly Procurement Card invoice is paid.

MI Rebate is a tiered percentage based on usage.

MN Rebate based on transaction volume, sales volume and prompt payment.

MO 1.44% rebate

NC Sliding scale for rebate percentage, depending on total annual spend from P-Card usage. Paid annually, about 5 months after end of fiscal year.

ND Tiered based upon purchase volume

NJ Rebate based on dollar volume.

NV Based on total spend, less big ticket items, times a prescribed number of basis points in accordance with the average number of file turn days.

NY Rebates are based on total value, speedy payment and number of returns. As usage increases and number of days for payment decreases rebate increases.

OH Any agent or credit card fee that is not disclosed to the agency shall be disputed immediately regardless of the dollar limit of the fee. Merchants should not be permitted to charge a service fee on the account unless the service fee is disclosed

OK Based on total spend and average transaction size of all participants and additional incentives for speed of payment. Target rebate is 1.5%.

OR Percentage based on value and speed of payment

PA 1.47% rebate

SC 0.015

SD 80 basis points for $5 million annual volume. 90 basis points for $10 million annual volume. 95 basis points for $20 million annual volume. Plus one additional basis point for each day for early payment under 25 days.

TN One rebate structure is Volume base and the second rebate structure payment base.

VA Percentage of spend using card

Credit/Debit Card Interchange NASPO Staff Contact: Fees And State Procurement Elena Moreland Senior Policy Analyst [email protected] (859) 514-9159 4 September 2012 Table 2. Fee/rebate structure of states’ purchasing card programs Source: 2011-12 NASPO Survey of State Procurement Practices

Responding States and Comments (37)

VT The rebate structure is based on a number of factors. Although not all factors are listed here, some include annual spend volume, payment terms, average spend on cards, etc.

WA volume % rebate plus a prompt payment % and the rebates are paid quarterly.

WI The State’s rebate is calculated using three factors: total spend, file turn and average transaction size. At the end of the contract year, both the average transaction size and total spend are aligned on a matrix to determine a percentage. The file turn day calculation is assigned a separate percentage. The two percentages are added together and that final percentage is applied against the State’s total volume.

WY Rebate rate structure available at http://sao.state.wy.us/Contracts/UMB%20Contract%200909.PDF

A Card Hub study2 noted that while interchange fees charged Controversy over Interchange Fees: by large banks decreased, banks recorded a loss of revenue Differing Viewpoints after the federal cap took effect in October 2011. According to the study, the interchange fees charged by large banks In 2009, the U.S. Government Accountability Office exam- have decreased significantly (59.3% for signature transac- ined the issue of interchange fees in the U.S. and concluded tions and 32.4% for PIN transactions) and those by small that options to reduce these fees could have a mixed im- banks falling 5.6% for signature transactions and 3.1% for 1 pact on cardholders and pose implementation challenges . PIN transactions. The Durbin Amendment ended up being Directly or indirectly, state governments can also be consid- very costly for banks: almost $8.4 billion on an annual basis ered “consumers” in this market and should expect an im- ($8.06 billion for large banks and $329.4 million for smaller pact. banks) and caused unintended consequences on the small merchants. There are arguments both in favor and against the federal cap on interchange fees that a bank can charge a merchant Others contend that changes in the debit card interchange to process a debit card. Interest groups even pushed to fees will not have a long-lasting effect, because of the loop- delay the implementation of the Amendment’s interchange holes in the legislation, such as other unregulated alterna- fee cap and urged Congress to repeal the Durbin Amend- tive payments: credit cards, prepaid cards, and small bank ment. Under the Federal Reserve Board Final Rule from debit cards that banks will try to take advantage of to offset June 2011, effective on October 1, 2011, the maximum per- the losses to their annual interchange revenue. For exam- missible interchange fee that an issuer may receive for an ple, the banking industry eliminated the small transactions electronic debit transaction shall be the sum of 21 cents per discounts, which hurt small retailers. Some of the largest transaction and 5 basis points multiplied by the value of the banks have eliminated debit card rewards, implemented transaction, plus a 1-cent fraud-prevention adjustment, if eli- new monthly checking account fees, improved rewards gible. The regulation does not apply to certain government- credit cards, and/or started offering prepaid cards3. administered debit cards, certain other prepaid cards, or debit card issuers with consolidated assets of less than $10 Both sides of the swipe fees issue are making their opin- billion. ions known. Merchants and plaintiffs in the lawsuit allege that interchange rates and fees have been subject to poten- tial price-fixing, as noted earlier in this document. Issuing

1 GAO Report to Congressional Addresses. (2009) Credit Cards. Rising Interchange Fees Have Increased Costs for Merchants, but Options for Reducing Fees Pose Chal- lenges. Retrieved from http://www.gao.gov/new.items/d1045.pdf 2 The 2012 Impact Study by Card Hub, a credit card search web site can be found at: http://www.cardhub.com/edu/interchange-fee-study-2010/ 3 Benefits of cap on debit card fees not expected to last, by Odysseas Papadimitriou, Published: January 27, 2012 in The Washington Post. Retrieved from http://www. washingtonpost.com/business/benefits-of-cap-on-debit-card-fees-not-expected-to-last/2011/12/12/gIQA4PWMVQ_story.html

Credit/Debit Card Interchange NASPO Staff Contact: Fees And State Procurement Elena Moreland Senior Policy Analyst [email protected] (859) 514-9159 5 September 2012 banks claim that reducing interchange fees would result in Other big retailers like Wal-Mart and Target, and groups like increased costs for cardholders, and reduce banks’ ability to the Society of Independent Gasoline Merchants of America offer rewards programs on cards already issued. Home De- (SIGMA) that are not a member of the class that filed the pot indicated that interchange fees are the company’s third suit, have expressed their disapproval for the settlement and highest operating cost, after real estate costs for its stores support efforts by merchants to change the alleged unfair and wages for its employees. and anti-competitive interchange fees by the credit card in- dustry. Both Wal-Mart and Target issued statements oppos- A large focus of the settlement discussion seems to be on ing the settlement indicating that the settlement constrains the provisions allowing merchants to directly pass along the emerging payments innovation and they do not intend to im- swipe fees to consumers, by charging additional fees for us- pose checkout fees. ing credit cards upon check out. Kroger, one of nation’s largest grocery retailers, has not Opposition to the lawsuit settlement terms seems to have made a decision whether they would start charging a check- grown over the weeks following the release of the proposed out fee but is considering providing a discount to cash-pay- settlement. Several groups, parties to the class action law- ing customers and those who use credit cards with less ex- suit, have already rejected its terms stating that they came pensive fees. up short of the much needed and expected interchange fee reform. Reoccurring comments included in the plaintiffs’ re- Comments on both sides of the argument, from all parties to jection statements are that the settlement provisions do not the lawsuit (including Visa Inc., MasterCard, and merchant restrain credit card companies from increasing the swipe associations) as well as statements from other industry fees in the future, and that it requires merchants to waive groups, big retailers, and those not associated with the class their rights to ever take any future legal action against the litigation, including a statement from U.S. Senator Richard card companies. Durbin [D-IL] have been summarized in Table 3.

Table 3. Position Statements from Interested Parties on Interchange Fees and Legal Settlement

Industry Group/ Position statement in favor of inter- Position statement against interchange fees Bank/ Retailer/ change fees settlement settlement Others Mastercard Inc. “Although we have strong defenses to all claims, a settlement avoids years of litiga- tion and uncertainties that are inherent in such cases.”

“We know that merchants care about their customers and anticipate that they will not impose checkout fees, particularly because the value merchants derive from card acceptance far exceeds their costs.”

“Throughout the litigation and as a condi- tion for resolution, the merchant plaintiffs sought a change to the current rule and we focused our efforts in settlement nego- tiations to ensure consumer safeguards were included.” (MasterCard Inc. Press Release)4

4 MasterCard Enters into Agreement to Settle U.S. Merchant Litigations, July 13, 2012. Press Release retrieved from http://newsroom.mastercard.com/press-releases/ -enters-into-agreement-to-settle-u-s-merchant-litigations/

Credit/Debit Card Interchange NASPO Staff Contact: Fees And State Procurement Elena Moreland Senior Policy Analyst [email protected] (859) 514-9159 6 September 2012 Table 3. Position Statements from Interested Parties on Interchange Fees and Legal Settlement

Industry Group/ Position statement in favor of inter- Position statement against interchange fees Bank/ Retailer/ change fees settlement settlement Others Visa Inc. “We believe settling this case is in the best interests of all parties.”

“We are comfortable with the terms, which we do not anticipate will impact our cur- rent guidance. Visa is well positioned to help drive the migration to electronic pay- ments in the U.S. and globally.”

The proposed settlement payments for both the Class and Individual claims would be approximately $6.6 billion, of which Visa’s share would represent ap- proximately $4.4 billion.

“[Visa] will go forward with a focus on helping retailers grow their businesses and providing them with efficient and valu- able payment options.” (Visa Inc. Press Release)5

The National As- NACS rejected the litigation settlement and sociation of Con- stated they will fight it if the other class represen- venience Stores tatives accept it. (NACS), a class “This proposed settlement allows the card com- plaintiff in the antitrust panies to continue to dictate the prices banks litigation charge and the rules that constrain the market including for emerging payment methods, par- ticularly mobile payments. Consumers and mer- chants ultimately will pay more as a result of this agreement — without any relief in sight.” (NACS Chairman Tom Robinson, NACS Press Release)6

5 Visa Inc. Press Release. July 13, 2012. Visa, U.S. Retailers Resolve Claims in the Federal Multi-District Interchange Litigation. Retrieved from http://pressreleases.visa. com/phoenix.zhtml?c=215693&p=irol-newsarticlePR&ID=1714726&highlight= 6 NACS Press Release. NACS Rejects Proposed Antitrust Settlement with Visa and MasterCard. July 13, 2012. Retrieved from http://www.nacsonline.com/NACS/News/ Press_Releases/Pages/default.aspx

Credit/Debit Card Interchange NASPO Staff Contact: Fees And State Procurement Elena Moreland Senior Policy Analyst [email protected] (859) 514-9159 7 September 2012 Table 3. Position Statements from Interested Parties on Interchange Fees and Legal Settlement

Industry Group/ Position statement in favor of inter- Position statement against interchange fees Bank/ Retailer/ change fees settlement settlement Others The National Gro- NGA’s Board of Directors unanimously approved cers Association, a resolution opposing the proposed interchange (NGA), a class fee settlement agreement. plaintiff in the antitrust “[T]he proposed settlement agreement terms litigation would curtail the opportunity for merchants to re- form the monopolistic fees and rules set by Visa, MasterCard, and their banks by requiring mer- chants to broadly waive their rights to take future action against the card companies.”

“The proposed settlement represents a small fraction of the $350 billion in swipe fees the card companies have charged merchants and ultimately consumers for the last seven years.” (NGA President and CEO Peter J. Larkin, NGA Press Release)7

National Community NCPA’s Board of Directors unanimously voted to Pharmacists Associ- reject the settlement. NCPA notes that the settle- ation (NCPA), a class ment comes short of expectations for needed plaintiff in the antitrust change, does nothing to prevent interchange fee litigation hikes in the future and curtails “pharmacies and other merchants from taking any future action against the credit card companies by releasing any and all claims going forward.”

“[W]hile the settlement appears to offer mer- chants the ability to pass along some excessive credit card fees to their customers in order to incentivize consumers to use alternative, lower- cost methods of payment, enough strings are attached and existing barriers exist to effectively eliminate this as an option.”( NCPA Press re- lease)8

7 NGA Press Release. July 26, 2012. NGA Opposes Proposed Interchange Fee Settlement with Visa and MasterCard Retrieved from http://www.nationalgrocers.org/news- room/press-releases 8 NCPA Press release. August 1, 2012. NCPA Board Rejects Proposed Legal Settlement with Visa, MasterCard over Credit Card Fees. Retrieved from http://www.ncpanet. org/index.php/news-releases/2012-news-releases

Credit/Debit Card Interchange NASPO Staff Contact: Fees And State Procurement Elena Moreland Senior Policy Analyst [email protected] (859) 514-9159 8 September 2012 Table 3. Position Statements from Interested Parties on Interchange Fees and Legal Settlement

Industry Group/ Position statement in favor of inter- Position statement against interchange fees Bank/ Retailer/ change fees settlement settlement Others National Coopera- NCGA rejected the settlement and urged other tive Grocers Asso- retailers to do so and push for a revised settle- ciation (NCGA), a ment. NCGA rejected the provision allowing class plaintiff in the individual retailers to charge checkout fees stat- antitrust litigation ing it is “a way to pass the burden to retailers of collecting non-competitive fees from consumers.”

“The practice of surcharging is an inadequate so- lution to the broader problem of swipe fees. The settlement also does not limit credit card issuers and credit card networks from hiking related fees in the future, and if accepted, would protect credit issuers from future lawsuits.”9

The Electronic Pay- The settlement ends a long political con- ments Coalition flict over interchange fees. “The legal pro- (EPC) cess worked and should send a signal to Congress that it is wrong to pick winners and losers in a complex between two industries.”10 U.S. Senator Rich- “[…] while swipe fee reform has made impor- ard Durbin [D-IL] tant strides in Congress, the big banks and card companies are trying to undercut that reform in the courts.”

“[…] the settlement […] binds every single Amer- ican merchant, charity, university, and State or local agency that accepts a Visa or a MasterCard today or in the future. It bars all of them from ever bringing a legal claim in the future against Visa, MasterCard, or the big banks relating to any swipe fee, other merchant fee, or network rule, no matter how unfair or unreasonable the fees and rules may be.”11

9 National Cooperative Grocers Association. August 3, 2012. NCGA Opposes Proposed Interchange Fee Settlement and Urges Industry Reform. Retrieved from https:// www.ncga.coop/node/5178 10 Electronic Payments Coalition’s Statement on Interchange Fee Settlement. July 13, 2012. Retrieved from http://www.electronicpaymentscoalition.org/settlement/ 11 The Library of Congress Thomas. Congressional Record. 112th Congress (2011-2012). Dodd-Frank Anniversary. Senate - August 2, 2012. Retrieved from http:// thomas.loc.gov/cgi-bin/query/z?r112:S02AU2-0030:/

Credit/Debit Card Interchange NASPO Staff Contact: Fees And State Procurement Elena Moreland Senior Policy Analyst [email protected] (859) 514-9159 9 September 2012 Table 3. Position Statements from Interested Parties on Interchange Fees and Legal Settlement

Industry Group/ Position statement in favor of inter- Position statement against interchange fees Bank/ Retailer/ change fees settlement settlement Others Target “Target believes the proposed interchange fee Corporation settlement is bad for both retailers and consum- ers. The proposed settlement would perpetu- ate a broken system, restrict retailers from any future legal action and offer no long-term relief for retailers or consumers. In addition, Target has no interest in surcharging guests who use credit and debit cards […]. We will continue to explore our options while working toward a solution that represents true reform.”12

Wal-Mart Stores, Inc. “The proposed settlement would not structur- ally change the broken market or prohibit credit card networks from continually increasing hid- den swipe fees, which already cost consumers tens of billions of dollars each year. [It] would require merchants to broadly waive their rights to take action against the credit card networks for detrimental conduct or acts. We believe the proposed settlement would also constrain emerg- ing payments innovation. […] we encourage all merchants to put consumers first and reject the settlement.”13

Society of Indepen- “The proposed settlement shields the card net- dent Gasoline Mer- works and banks from market forces and from chants of America future litigation challenging their conduct. By (SIGMA) the time merchants receive any funds from the settlement agreement, interchange fees will have increased and merchants will still be forced to accept anticompetitive, take-it-or-leave-it rules set by the card networks regarding card accep- tance.”14

12 Target’s Statement on the Proposed Interchange Fee Settlement. July 20, 2012. Retrieved from http://pressroom.target.com/pr/news/target-statement-proposed- interchange-fee-settlement.aspx 13 Walmart’s Statement Opposing the Proposed Interchange Fee Settlement. July 24, 2012. Retrieved from http://news.walmart.com/news-archive/investors/walmart- statement-opposing-the-proposed-interchange-fee-settlement-1717584 14 SIGMA’s Statement on Proposed Antitrust Settlement with Visa and MasterCard. Retrieved from http://www.sigma.org/policy-positions/3.1.fs

Credit/Debit Card Interchange NASPO Staff Contact: Fees And State Procurement Elena Moreland Senior Policy Analyst [email protected] (859) 514-9159 10 September 2012 Table 3. Position Statements from Interested Parties on Interchange Fees and Legal Settlement

Industry Group/ Position statement in favor of inter- Position statement against interchange fees Bank/ Retailer/ change fees settlement settlement Others Kroger Co. “[…] the settlement represents the best opportunity to resolve the litigation and to begin exercising a new ability to reduce costs for our customers. […] through discounted pricing on certain electronic payments, we can begin to move consumers toward more efficient and lower cost products. That represents the first leverage point we have with the big credit card companies ever.” (Kroger’s spokesman, Keith Daley)15

Small Business and “Unfortunately, one group involved in Entrepreneurship seeking price controls, the National Asso- Council ciation of Convenience Stores, is not sat- isfied, and reportedly is going to challenge the settlement. That would be unfortunate if they gained traction in the courts or in the halls of Congress, as it would simply translate into continued uncertainty.”16

Americans for “Once again, the courts are better Prosperity equipped to deal with the issues facing private parties in contractual agreements than Washington bureaucrats who are further from the source of the real prob- lems.”17

National Taxpayers “Further interference from Congress or Union (NTU) the Executive Branch, with this settle- ment or with future legislation or regula- tion, could hurt consumers, inflict further damage on an ailing economic recovery, and introduce even greater uncertainty in future business decisions.”(NTU Press Release) 18

15 Supermarket News. Kroger Applauds Credit-Card Settlement Article by Jon Springer. July 16, 2012. Retrieved from http://supermarketnews.com/kroger-co/kroger- applauds-credit-card-settlement 16 Electronic Payments Coalition. Interchange Settlement. What Others Are Saying. July 13, 2012. Retrieved from http://www.electronicpaymentscoalition.org/settle- ment/ 17 Electronic Payments Coalition. Interchange Settlement. What Others Are Saying. July 13, 2012. Retrieved from http://www.electronicpaymentscoalition.org/settle- ment/ 18 National Taxpayers Union Press Release. July 16, 2012. Interchange Fee Settlement Should Serve as “Hands-Off” Message to Congress, Says Taxpayer Group Retrieved from http://www.ntu.org/news-and-issues/economy/financial-industry/716interchange-fee-settlement.html

Credit/Debit Card Interchange NASPO Staff Contact: Fees And State Procurement Elena Moreland Senior Policy Analyst [email protected] (859) 514-9159 11 September 2012 the amount of the surcharge. Additional scored ques- tions may be considered where additional points would Discussion and Questions about be granted for accepting the card, to further incentivize Potential Impact of Interchange Fee vendors to not have a surcharge, or keep it very low. Reform on State Procurements State procurement offices may explore solutions such as including P-Card acceptance as a mandatory re- There are many questions that remain regarding the poten- quirement in the bid evaluation criteria and/or disquali- tial impact of this issue -- and its associated class action fying vendors that are going to charge a surcharge. settlement -- on state procurements. One concern is wheth- er banks would seek to cut credit card reward programs to • Credit card purchases are a convenience and a great offset the recent loss of revenue following the debit card time saver (for example, as opposed to processing reform and reduction in debit card interchange fees. This additional paper purchase orders and invoices) that would have negative consequences on states’ P-Card pro- states are currently using that could be negatively im- grams and revenue streams. At this juncture, it is still too pacted if P-Cards are less accepted because of high early to know how banks or merchants will ultimately react, costs of using credit cards. i.e. whether banks will seek to offer reduced state rebate programs, or if merchants will impose surcharges on credit • Vendors may feel the negative consequences in terms card purchases or increase their prices. of speed of payment if they choose not to use the P-Card (24–72 hours vs. payments up to 30–60 days Imposing a surcharge for card-based transactions is current- by check). ly prohibited in ten states: California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Okla- • Potential surcharge fees from vendors will likely drive homa, and Texas. If the settlement is approved, more states up the cost of using P-Cards. The rebates offered may may decide to pursue such legislative solutions to prohibit not offset the added costs. merchant surcharges. • States may be able to offer incentives for alternative Points for State Governments to Consider forms of payment in exchange for a discount to offset increased rates. • Provisions in the class action lawsuit settlement regard- ing checkout fees may impact states’ P-Card programs • Can/should states require that additional fees be item- that rely upon the revenue generated by the rebates ized or require that these fees be incorporated into the received from banks. Most states, as noted in Table 2, fixed final costs of our procurement actions -- what are entered into P-Card rebate programs with banks and states’ options? receive incentives (at a savings to the State) for ac- cepting credit card payments for state procurements. An example from the State of Delaware’s current bid tem- Naturally, any added costs and fees might make a non plate is presented below. It pertains to methods of payment, P-Card incentive more attractive to the detriment of the and states may want to consider it further: state P-Card program’s revenue stream. Method of Payment • Vendors seeking alternative forms of payment as a re- “The agencies or school districts using this award will sult of the settlement may drive down the P-Card pro- authorize and process for payment each invoice within grams’ sales volume. thirty (30) days after the date of receipt of a correct in- voice. The State of Delaware intends to maximize the • Some states already use language in their goods and use of the P-Card for payment for goods and services services bid solicitations to determine whether vendors provided under contract. Vendors shall not charge ad- would accept a P-Card. All fifty states may consider ditional fees for acceptance of this payment method and addressing this issue by including language in their shall incorporate any costs into their proposals. Addi- state’s standard bid template, asking whether there is a tionally there shall be no minimum or maximum limits on surcharge for accepting a credit card for payment and any P-Card transaction under the contract. While it is the

Credit/Debit Card Interchange NASPO Staff Contact: Fees And State Procurement Elena Moreland Senior Policy Analyst [email protected] (859) 514-9159 12 September 2012 State’s intention to utilize the P-Card payment method While key areas for state governments to consider have the State reserves, at its discretion, the right to pay by been presented in this paper, there are issues and questions ACH/ ACI or check. Should a Vendor wish to provide that remain and need to be explored in a follow-up study, if a financial incentive to not process payment by P-Card the settlement is approved: in their proposal, they are to prepare their proposals to clearly outline any incentives for alternative payment • How can states measure the financial impact of the methods the Vendor is willing to accept.” settlement terms on state procurement activities?

If the settlement is approved, Delaware will likely amend the • What is the impact to state P-Card programs that rely language regarding fees for acceptance of credit cards to on volume based rebates offered by banks, should vol- read “Vendors may elect to itemize the costs for acceptance ume decrease as a result of added costs and surcharge of P-Card in their proposal provided that any cost provided fees charged by vendors to accept credit cards? shall represent the total cost for use of the P-Card under the Vendor’s proposal including any surcharges or transactions • What is the impact to state P-Card programs that rely fees.” on rebate programs, should rebate percentages of- fered by banks decrease?

Credit/Debit Card Interchange NASPO Staff Contact: Fees And State Procurement Elena Moreland Senior Policy Analyst [email protected] (859) 514-9159 13 September 2012