We’ve heard a good deal of chatter the last couple of weeks over the U.S. District Court’s decision to kill the Fed’s new rules on interchange. For the uninitiated, interchange is the fee that a bank charges merchants for authorizing transactions on cards issued by that bank.

 In return for the interchange fee, merchants get assurance that the card is OK, the funds are available and the merchant is reasonably assured of getting paid for the sale. Sounds like a good deal to me.

But merchants have always griped that the interchange fees are too high. For years they’ve heavily lobbied Congress to order banks to reduce their fees. 

Congress dutifully complied by adding §920 of the Electronic Funds Transfer Act. The Act regulates consumer rights in electronic payments. §920 authorized the Federal Reserve Board to set debit interchange rates.

Having done its work, Congress handed the pricing issue off to the Fed to figure out, and went on to less taxing things. Like recess. The Fed, stuck with the task of micromanaging a business that even some payments experts don’t understand, in effect capped the interchange rates at a price drastically lower than market value. But that wasn’t good enough for the merchants. So they sued the Fed.

On July 30 the court ruled in NACS, et al. v. Board of Governors of the Federal Reserve System that the Fed goofed when it set prices for interchange. U.S. District Court Judge Richard Leon ordered a do-over. His ruling instructed the Fed analysts to go back to the drawing board and come up with still lower rates.

Judge Leon relied in his decision on the words of no less a banking authority than Sen. Dick Durbin, who had proposed the amendment to the EFT Act, and had lobbied for it for years.

Now, I like Sen. Durbin. I admire his spunk. His candor. His Chicago-style directness. He’s Anthony Weiner with clothes on. But he’s a politician. A partisan. He’s not exactly an unimpeachable source of information.

As my good friend and payment expert Peter Quadagno says it wasn’t the Fed that erred—it was the Court. In examining the pricing the Court failed to consider the net present valueof the debit routing systems. In other words the value of the pricing should reflect not just what the last transaction cost, but cumulative costs over time that it took to develop the routing systems to their current state.

Pricing, unfortunately, was the easy part. Judge Leon also took the Fed to the woodshed for the way it implemented Congress’ instruction on making sure that merchants had alternative routing paths to get those authorization transactions back to the banks.

Now, it’s worth knowing that there are two types of debit card transactions. “PIN” debit transactions are authorized by the cardholder keying in his secret passcode when he makes a purchase with his debit card. “Signature” debit transactions are authorized when the debit cardholder signs for the transaction.

Somehow Judge Leon divined that the Fed intended that the “alternative routing” meant that for each authorization method there should actually be fouralternatives, not two: two competing methods for signature and two for PIN debit authorization.

Further, the Oracle of DC somehow figured out that what Congress really meant, as opposed to what it wrote, was that merchants should have their choice of network routing after the transaction is authorized by the bank. Huh? How do you authorize the network route after you’re already sent the message on a network? This isn’t like shopping in a catalog. You don’t thumb through the book, find the rate you want and then call a network’s 800 number.

Needless to say, the Fed is appealing Judge Leon’s Opinion.

The reason I bring all this up is that it is a textbook case of what happens when government decides to bigfoot its way into the free market. Here you have the daily double—both Congress and the courts setting prices. All you need is Pres. Obama weighing in and you’ll have the trifecta of government –created market distortion. Somehow I think the president has more important things to worry about.

My word to the plaintiffs in this case: You’re big boys. Time to grow up. If you don’t like your electronic payments deal, negotiate a better one. Or better yet, stop taking credit and debit cards. There are a lot of businesses that still refuse to honor plastic. They’ve made an intellectually honest business decision based on the market.

But big department stores and box retailers know that most of their payments are plastic. And they don’t want to risk alienating their customers. Seeking court protection on fees is intellectually dishonest. It’s dishonest because ultimately the retailers don’t pay those fees. Interchange is a selling expense that is passed on to customers in the form of higher pricing.

But following the implementation of the Fed-mandated lower interchange rates, you’d have better luck finding a light bulb in Aisle 87 at Home Depot than you would a retailer who shared the interchange savings with its customers.

So this isn’t about asking the Court to redress unfairness in the market. It’s about a nasty, cheap way to grow margin without having to do any work for it.

Government price fixing is a slippery slope. If the solons in Congress want to do something useful, they can create fiscal conditions that are conducive to creating a healthy and vibrant economy. Not one distorted by the dead hand of government. 

If you follow the comings and goings within the financial services industry you’re familiar with the issue of EMV. It’s an issue every consumer needs to be aware of because the changes being discussed affect your debit card.

EMV stands for Eurocard, MasterCard, and Visa. It is a security standard established by the three card brands (MasterCard subsequently acquired Eurocard) in 1994 for payment cards like your debit card. Rather than rely on the humble magnetic stripe on the back of your debit card for dealing with your personal card data, EMV uses a harder-to-hack computer chip on the card for authorizing your PIN.

Today all industrialized countries with the exception of the U.S. and Israel have adopted EMV. There are a lot of reasons for that which we won’t go into. Suffice it to say that the financial industry is in the midst of a barroom debate over the best way to implement the standard.

Here are the players: On one side you have the two big card brands, Visa and MasterCard. Allied with them are the major card issuing banks. These are the institutions that issue millions of debit cards that carry the Visa and MasterCard brands.

Visa and MasterCard have upped the ante on EMV by setting deadlines for various industry segments to comply with their diktat to accept EMV-enabled cards. Their leverage is an attempt to shift fraud liability from the card issuing bank to the retailer or ATM where a debit card may have been scammed.

On the other side you have the other players who are involved every time you use your debit card. These include the retailers who accept the cards, the ten or so PIN debit networks that transport your card data back and forth from your financial institution so your purchase transactions can be authorized, transaction processors and assorted smaller financial institutions like credit unions and community banks.

It’s important also to note that this debate is being conducted against the backdrop of a ten-year feud between the big-box retailers on one hand and Visa and MasterCard on the other.  Like most business conflicts this feud comes down to money. The retailers have alleged that the card brands make too much money processing the card that people use to pay for stuff they sell. So far the retailers appear to have gotten the better of the card brands. This includes billions of dollars in settlements, not to mention Congressionally-mandated price caps on how much banks can make on the interchange they charge retailers for authorizing their card transactions.  

So amid this poisoned atmosphere the parties are attempting to negotiate the implementation of what is arguably the biggest technology shift in the payment card business since electronic data capture at the point-of-sale terminal.

A key sticking point right now is a piece of software in computer chip called an Application Identifier, or AID. The way things are done now a POS terminal or ATM will pick up the bank identification number from a card and rout the transaction to that bank for authorization. But EMV is different. The routing scheme is determined by that AID. So the transaction will be routed over the network that has its AID on the card.

The issue of routing is important here to consumers. He who controls the routing for the most part controls who gets the bulk of the processing fees when you use your card. If a consumer’s card doesn’t have the application that routs the transaction over a particular network, that network makes no money. So the threat to consumers ultimately is loss of this multitude of competing networks and potential higher card fees.

Right now Visa and MasterCard are in the catbird seat. As global companies they’ve been issuing millions of cards with their AIDs for years. They also have relationships will all of the major card-issuing U.S. banks. Their motivation to negotiate with their potential competitors who are starting from scratch in EMV appears, shall we say, limited.

For their part the PIN debit networks (Everyone in this story has an acronym or nickname. Let’s call them the PDNs) not named Visa or MasterCard have struggled mightily to come up with a solution. Their proposal is to join forces and develop a single common U.S. debit payment AID.

This seems like a common sense solution: cards with a Visa or MasterCard AID as well as the common AID. But it creates two new problems. First, will card issuers, who own the card real estate, agree to put a second application on their cards, just to keep the PDNs in business? And second, will retailers configure their system to recognize that common AID? At least one large big-box retailer has said it will only accept cards with one application of which the AID is part. Any others will be stopped at the register.

So there you have it. A high stakes game of Texas Hold ‘em. Who wins? Here’s what I think:

The PDNs are fighting for their collective lives here. The common AID is a good solution but time’s probably running out on them. They’re like a football team that’s run out of time-outs and is having trouble getting the right players on the field for one last Hail Mary play.

As far as the retailers go, they can harrumph all they want and arrogantly lay down the law to issuers. But big-box retailing is a high-volume, low-margin business.  Are merchants really going to jeopardize throughput in the checkout lane by sticking to their one-application rule? Will they incur the ill will of customers and the cost of abandoned orders and carts as disgusted customers walk out of their stores? Their technologists might want to. But has anybody talked to the C-suite? Standing in a checkout lane at these stores is already like watching paint dry. You really want to make it slower by having cards rejected in lane?  Time is money. I’d call their bluff.

And are these retailers, who have fought the global brands tooth and nail for ten years going to give the global brands a captured market? Put their only competitors, the PDNs, out of business ? I’m not taking that bet, either.

And why wouldn’t card issuers put a second application on a chip? Sure, it might require a little baksheesh from the PDNs, but this is business. Everything comes down to money. If the PDNs understood that, which I don’t think they do, they’d start talking dollars with the issuers. Will that happen? I’ll bet that it does.

This is a long story. But long story short, EMV will happen when the business people in these organizations figure out who gets to make the money here and how much. Right now the process is being driven and filtered by the technologists. Once the business people figure out which way the money flows, EMV will get implemented. Like everything else in business, it all comes down to money.

Most consumers who have bank accounts have had occasion to use an ATM. While many ATMs can multi-task—accept deposits, transfer money, etc.—most people just use them for taking out cash. There are over 400,000 ATMs operating in the U.S. today. About half are controlled by banks and the other half by independent ATM owners or merchants.

If you’re of a certain age and remember writing checks to “Cash” and trying to find a bank that would take your check when you needed some "street money," as we say, an ATM is nothing short of a miracle. But the downside of ATMs in getting stuck with the fees charged to use them.

A group of U.S. senators thinks that downside is pretty steep, so they commissioned the General Accountability Office to study them. The GAO, in a report published this past April not only looked into fees, but also into the business dynamics of the ATM industry. What they found may surprise you.

The “fee” charged to use an ATM will vary by the owner, much in the same way that rental car fees or hotel rates differ by company based on that company’s business case. In the case of ATMs, there is no “fee,” but a series of fees. For example, using the ATMs owned by the bank that issued your ATM card is generally part of the deal. But if you use a machine not owned by your bank, you’re likely to be assessed a surcharge of a couple of bucks. In addition, when you use someone else’s machine, your bank is likely to charge you an additional “foreign” fee for having to tell another ATM owner that you have enough money to cover the transaction.

On top of those, your bank will have to pay the ATM owner an “interchange” fee to compensate the foreign owner for the use of his machine. Interchange fees charged by banks to merchants for accepting their debit cards have been become such a bone of contention that Congress in 2010 instituted price caps on them.

There are also “switch” and “acquiring” fees that are paid to the electronic networks that move the transactions back and forth between banks and ATMs.

If all of this sounds pretty arcane, it is. The GAO has tried to sort through the details in its April 2013 report. There are really three factors that underlie the ATM fees. The first is competition. Consumers may pay a certain surcharge in an area where there is an ATM on every corner. On the other hand, use an ATM where the owner has a captive audience—such as a mall or an airport, where it may be the exclusive provider—and you’ll probably pay more.

The second factor that drives fees is the cost to operate a certain machine. Independently owned machines placed in areas where they are subject to damage or additional security requirements are likely to feature higher surcharges to help recover the higher cost of operation. Banks, which may use ATMs to advertise other services or attract new customers, may feature lower fees because costs may be offset by other sources of revenue.

A third factor is usage. The more transactions that flow through an ATM the greater the base over which the operating costs can be spread. A machine that sees less activity has fewer units (transactions) over which to spread its costs, resulting in higher pricing per unit at that machine.

Consumers who wish to lessen the cost of ATM usage have a few options. Many banks and ATM owners belong to so-called “surcharge-free” networks. These networks work out deals with ATM owners that allow consumers to use their machines free of surcharging. Consumers can also restrict their ATM usage to their own bank’s machines. This will eliminate surcharges and foreign fees. Third, consumers can work ahead on their cash needs and request cash back when they use their card at a merchant point-of-sale terminal so they don’t have to visit an ATM quite as often. There’s no need to be paying top dollar every time you use an ATM when these options are available.

If this sounds like humdrum Consumer Economics 101, that’s because it is. These are the same pricing decisions that any business—large or small—goes through. American consumers are pretty savvy but they need to remember that when they pay to use an ATM what they’re buying is convenience. With a little information they can figure out how much ATM convenience they want to buy.

  Nevertheless, look for Congress to use the GAO’s extensive report as justification for rounding up the usual financial industry suspects for hearings on the subject of ATM fees. If past is prologue expect significant political pressure on ATM owners and their profitability. And if that results in elimination of the least profitable of those 400,000 ATMs, the convenience that ATMs offer will become a lot less convenient for consumers—and a little bit more expensive.