Why Credit Card Interchange Fees Should Come Down

Juan Lagorio is right. The various proposed bills regulating interchange fees — the fees that merchants pay whenever a customer uses a credit card to pay for something — could definitely hurt Visa (V) and Mastercard (MA), despite the fact that Visa and Mastercard don’t actually charge those fees and claim that they would not be impacted by the legislation.

How do we know that Visa and Mastercard are worried? Well, for one thing, Shawn Miles, the head of global public policy at Mastercard, has written an essay arguing against them:

No matter how loudly the big box merchants claim the mantle of “Protector of Consumer Interests,” granting big box merchants a collusionary antitrust exemption will have the opposite effect: less credit availability, higher prices, and reduced choice for consumers.

Miles points to the precedent of Australia, which saw credit-card fees rise after the government mandated lower interchange fees. But the post hoc ergo propter hoc argument is weak: For-profit card companies will naturally raise fees as much as they can no matter how much or how little money they make on interchange. It’s the same mechanism driving penalty rates of interest. And indeed the base case in the US is for a slow yet inexorable rise in interchange fees: One purpose of this legislation is to try and put an end to interchange-fee inflation (up 14% last year to about $48 billion, averaging an eye-popping 1.75% of total purchases).

In Australia, by contrast, interchange fees are now about 0.5%, which means there’s a lot of room for current fees to fall. What’s more, as Adam Levitin points out, the bills currently being considered by Congress don’t go nearly as far as the Australians did: they don’t mandate a fall in interchange fees, but just allow merchants to get together on one side of the negotiating table, against the small and powerful card issuers on the other side. Mastercard’s Miles characterizes the bills as “interfering with competitive pricing”, but that’s not really the case at all: pricing right now is pretty much unilaterally set by the card issuers, and the bills would introduce a much-needed bit of pushback from merchants.

Would lower interchange fees mean lower prices for consumers? Probably not — I suspect that Miles is right when he says that the profits would largely go straight to retailers’ bottom lines. But there’s really no reason why card companies should take $48 billion a year out of retailers’ profits — especially not when small merchants are disproportionately hit, sometimes paying 4% or more of their credit-card revenue to the bank. (You think those reward cards are great for you? You’re right, but the merchant will probably pay a higher fee when a reward card is used than when a regular card is used. If you want your merchants to do well, maybe think twice about using those rewards cards.)

On the other hand, there’s no reason whatsoever to believe Miles when he says that credit availability will go down, that prices will rise, or that “choice for consumers”, whatever that’s supposed to mean, will be reduced. The main thing that will fall is the card issuers’ profits — and that’s by design.

Comments

[jeffereyf20...:]

The whole point is to benefit the consumers....and if walmart is just going to pocket the benefit and not pass it to the consumer then why force down the interechange fee? The government thinks they are helping the consumer but they are just passing the profit from the card processors who maintain these networks to the retailors who would lose business if it was not for the credit card networks. Your theory is horrible and credit card networks make about .25 per transaction...most of the amount charged goes to the issuing banks...the issuing banks will be hurt more than MA or V because they will collect less most likely because MA and V will still get their cut to maintain the most fastet network they can provide for processing transactions.

Jun 25 04:15 PM

[jeffereyf20...:]

most of the amount charged goes to the issuing banks...the issuing banks will be hurt more than MA or V because they will collect less because MA and V will still get their cut to maintain the fastest network they can provide for processing transactions...needed some edits


On Jun 25 04:15 PM jeffereyf2003x2 wrote:

> The whole point is to benefit the consumers....and if walmart is
> just going to pocket the benefit and not pass it to the consumer
> then why force down the interechange fee? The government thinks they
> are helping the consumer but they are just passing the profit from
> the card processors who maintain these networks to the retailors
> who would lose business if it was not for the credit card networks.
> Your theory is horrible and credit card networks make about .25 per
> transaction...most of the amount charged goes to the issuing banks...the
> issuing banks will be hurt more than MA or V because they will collect
> less most likely because MA and V will still get their cut to maintain
> the most fastet network they can provide for processing transactions.

Jun 25 04:19 PM

[Ralph M.:]

The card issuing banks just got hammered by the CARD Act legislation - to the point where their profitability has been virtually wiped out. More turmoil is the last thing this industry needs right now.

Jun 25 06:32 PM

[PaymentsGuy:]

Interchange is not just a way for card issuers to make money, it is a way for the card brands to compete for issuers. Issuers make choices about what brand of cards to issue, and the revenue from interchange is a major piece of that decision process. You can see this happening right now with the debit market, as Visa gains massive share with aggressive interchange pricing (i.e. good for banks) .

It's the classic two-sided market. If you bring merchants and card brands to the table but leave out the banks, you are simply shifting the pain from one side of the market to the other.

Jun 26 10:04 AM

[Greame H:]

as a Merchant, the past 12 months has seen an inexorable rise in "nickle and diming" fees charged on the MA and VISA monthly statements. MA is the worst offender. However , as the weakest of the various major forms of plastic, it is vulnerable to a merchant backlash. We are going to do a one store test of eliminating our MA offering and see if the combination of Debit, Visa, Amex is adequate. If so, and reproduced on al arger scale, MA will have to respond competitively and in turn cap the industry pricing pressures.( ask yourself, who doesnt have multiple cards, and loyalty cards only count so much )

Jun 26 10:42 AM

[Greame H:]

as a Merchant, the past 12 months has seen an inexorable rise in "nickle and diming" fees charged on the MA and VISA monthly statements. MA is the worst offender. However , as the weakest of the various major forms of plastic, it is vulnerable to a merchant backlash. We are going to do a one store test of eliminating our MA offering and see if the combination of Debit, Visa, Amex is adequate. If so, and reproduced on al arger scale, MA will have to respond competitively and in turn cap the industry pricing pressures.( ask yourself, who doesnt have multiple cards, and loyalty cards only count so much )

Jun 26 10:42 AM

[Jestep:]

I am strongly against regulation of interchange. Another thing that you, most consumers, businesses, and definitely the government don't take into account is that interchange doesn't cover any of the costs to the company that acquires the merchant account (An ISO in the US, or a bank in most other countries).

While businesses in the US pay some of the highest interchange, they pay some of the lowest fees overall. What they don't tell you about countries with capped interchange is that the actual fees that businesses pay are substantially higher, because there is no front-end competition, such as with the ISO industry in the US. When banks or a few companies control the entire industry, there is no competition. Just look at the cellular industry. The costs for cellular services are tremendous, and there's no reason that ATT or Verizon would lower their fees, because people only have 2 options, and will pay for one of them. Australia, Canada, and other countries with "low" interchange face a similar situation with their processing fees. Banks control everything, there is no front-end competition, and businesses get gouged on equipment, service fees, or setup fees. People are upset about interchange, but it is free to setup a merchant account, equipment is very competitively priced, and businesses have thousands of options on who to process with. Go to Canada, where it can cost $2,000 for a terminal that cost $200 in the US. Or pay $1000 to open a merchant account, when it's completely free in the US.

Additionally, the mess that would be created by trying to facilitate a system in which all merchants can negotiate with V/MC is insane. There are about 8 million businesses in the US. Just imagine if a fraction of them started calling incessantly about negotiating their rates directly to V/MC. Maybe some sort of watchdog organization would be appropriate, but to create a system that allows and promotes such chaos, is not a responsible method of trying to deal with this.

Jun 26 11:18 AM

[Credit_Card...:]

Their profitability won't be wiped out. It simply will be reduced, and only momentarily. I'll bet you a dollar that a year from now, cardholders will be paying a series of newly invented fees whose names we do not know now.
As was pointed out this week in the New York Times, credit unions issue credit cards that already by and large comply with the CARD act's tenets, and they are consistently profitable. www.nytimes.com/2009/0...


On Jun 25 06:32 PM Ralph M. wrote:

> The card issuing banks just got hammered by the CARD Act legislation
> - to the point where their profitability has been virtually wiped
> out. More turmoil is the last thing this industry needs right now.

Jun 26 12:33 PM

[OldNavySailor:]

I have totally removed myself from this point of contention because I no longer use credit cards. I use cash to pay for my purchases. Retailers like to see me because they know I'm saving them the cost of the interchange fee. I still purchase things that I need as much as before, just not with that plastic debt maker.

Perhaps American retailers should develop a marketing plan to incentivize customers who pay for products or services with cash instead of credit. A national initiative like this would encourage people to think about the importance of money and real wealth, not debt.

Jun 26 12:52 PM

[B. Sharma:]

Consumer protection against predatory business practices, absolutely yes! Small business protection against arm-twisting by big businesses, highly desirable. Government intervening in how the big businesses ought to divvy up profits --- why would you think any good can come of it?

If you have any example of government intervention in profit allocation between large businesses on an ongoing basis achieving any societal good, I would be most appreciative to hear about it. I can't think of any.

Jun 26 10:42 PM

[findbizcards:]

No matter what you do when it comes down to fees, they are always going to find to recoup them. For instance, look at the credit card ACT. They are already adding annual fees, jacking up interest rates, and more. It's just going to continue to hurt those that do good with their managing of money.

Oct 19 09:46 AM