Sen. Dick Durbin, (D-Ill) introduced the following legislation today regarding interchange rates:

“Under Durbin’s bill, retailers would be able to engage in collective negotiations with the providers of any electronic payment system with significant market power (i.e., 20% or more of the credit and debit card market) over the fees and terms for access to that system.  If the retailers and providers do not reach a voluntary agreement on fees and terms, the matter would be brought before a panel of three expert judges appointed by the Department of Justice Antitrust Division and the Federal Trade Commission.

These judges would investigate the fees, terms, and overall market conditions for electronic payment systems.  The judges would then order a mandatory settlement conference, and if the settlement conference failed to result in an agreement between the retailers and providers, the judges would conduct a hearing where each side would present their final offer of fees and terms.  The judges would then select the offer that most closely represented the fees and terms that would be negotiated in a fair and competitive market.  The judges’ decision would govern access to the electronic payment system for a period of 3 years, but could be superseded at any time by a voluntary agreement concluded between retailers and providers.” (http://durbin.senate.gov)

As I’m reading this, I’m imagining the scene in front of the judges’ panel, as merchants and networks duke it out in open court.  Notwithstanding whether this is or is not a good idea, the fact is that it represents the opening salvo in a regulatory battle that may change the face of interchange in the U.S. for many years to come.

Particularly if a Democrat takes the helm this November and the free market free-for-all gets stomped on, it seems more likely that relief is on the way, but at what cost?  Even though the issuers are being dragged through the mud as one big, predatory-lending group, the fact remains that interchange has been an effective, if flawed, funding mechanism for both sides of the transaction. 

We need to be cautious about throwing the baby out with the bath water, but it is certainly time for the major networks to step up to the plate with more than just additional layers of pricing.  It’s time for interchange to begin the migration to a value-based system.  Waiting too long to react and hoping it’ll all go away, may not work out very well as more legislators jump on the wagon in a political and economic environment seeking scapegoats.