Remember this debate is about reward cards versus debit cards. Merchants love debit cards, they are easier than cash. They don’t want to subsidize the airline industry by having to pay for rich people’s frequent flyer miles reward card for free, without anything in exchange for providing an additional good or service.
But they can’t give incentives for debit cards under current law. They can’t offer you a free loaf of bread with your groceries for typing in your pin, or give you your very own pin express checkout lane, for using debit. That is valuable local information and retail innovation that is lost. So watch for interchange rates being juked between high rewards credit cards, generic credit cards, the abomination that is “signature debit”, and pin debit.
I am not certain whether or not Hill staffers are currently being bombarded with financial lobbyists with vested interests claiming all kinds of decreases in interchange over the past decade. This data is very hard to find, as the credit card companies guard it viciously. Now, I’m just a dude with a matlab license and a free blog, so let me tell you what other credible people have researched and found recently.
GAO Report, November 2009
The GAO released a report: “Rising Interchange Fees Have Increased Costs for Merchants, but Options for Reducing Fees Pose Challenges.”
The title says a lot, but let’s consider two factoids from it. First is figure 3, document page 17 (click to enlarge):
Analysis by Federal Reserve staff also showed that interchange fee rates have increased, particularly for premium cards that have higher rates than basic cards. As shown in figure 3, the interchange fee costs for Visa’s and MasterCard’s premium cards have increased about 24 percent since they were introduced in 2005. Interchange fee costs for basic credit cards have stayed roughly the same since 2005, with a 3-percent decline for MasterCard and none for Visa.
So watch for that trick. Another image, one that I like to focus on further (click to enlarge):
Averages for financial statistics are funky things, and they are often easy to juke and manipulate. (Trust me.) A really good way to determine the trend is to watch specific contracts evolve over time. And from the GAO report (my bold):
Merchants’ card acceptance costs also have been increasing as a result of rising average interchange fee rates. Visa and MasterCard officials told us that their average effective interchange rates applied to transactions have remained fairly constant in recent years when transactions on debit cards, which have lower interchange fee rates, are included. However, our own analysis of Visa and MasterCard interchange rate schedules shows that the interchange rates for credit cards have been increasing and their structures have become more complex…
While some of the networks’ interchange fee rates remained the same during this time and a few decreased, another reason merchant card acceptance costs are increasing may be that individual interchange fee rates also are increasing. According to our analysis, from 1991 to 2009, 43 percent of the individual Visa rates and 45 percent of the MasterCard rates that prevailed in 2009 had been increased since they were originally introduced. Our interchange fee rate analysis showed that the interchange fee rates that increased the most during this period were for some standard card types.
Holding contracts constant, 44% of rates increased, while only 12% declined. And the GAO found that the rates that increased the most were for the standard card types.
I love charts. Here’s another one (click to enlarge):
Source is Federal Reserve Bank of Minneapolis.
USA number one! I just came from a conference on interchange where nobody could explain this. I’d be curious how lobbyists explain it when pressed.
New York Times
There’s also this New York Times story from January 2010, which gives us this graphic (click to enlarge):
And this story:
One large retailer, who requested anonymity to preserve its relationship with Visa, provided data that showed Interlink’s share of PIN purchases rose to 47 percent in 2009, from 20 percent in 2002, even as its fees steadily increased ahead of most other networks — to 49 cents per $100 transaction in 2009, from 38 cents in 2006.
Visa officials say its PIN debit network is taking off despite rising costs because it offers merchants, banks and consumers a level of efficiency and security that regional networks cannot match. “We are motivated as a company to try to drive value to each one of those participants so that they accept the card, issue more cards, use the card,” Mr. Sheedy said.
As Felix flagged back when, the magic story of the rising falling interchange fees is a story of that graph. That’s the story of “effective” interchange staying the same.
Lobbyists will say that “effective” interchange has stayed the same. See the trick? People are using debit more than credit, and debit is lower, so even though they are rising they effectively stay the same.
(I was told this once by a credit card lobbyist and I accidently laughed and said “aww I remember juking my first financial statistic too by weighting the mean. That’s adorable.” I supposed that’s why, instead of me getting credit card company money, my poor editors, like Derek Thompson, get correction requests for blog posts. Sigh.)