PaymentsGuy

Why Credit Card Interchange Fees Should Come Down

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.

Duopoly Visa and Mastercard Vs. Retailers - Who Wins in a Free Market?

gpatrick: the merchant processor sets only a small piece of the total merchant fee. Interchange is by far the largest piece of merchant costs. It is set by the card brands (V,MC) and processors have no ability to change it. When negotiating processing, merchants can only affect the processor’s markups and fees.

Merchants have some good points. The fees are essentially take it or leave it, seem high, and change in an apparently arbitrary manner. But don’t wave off the other side as “big bad banks and their monopolistic buddies.”

Interchange is not a "hidden fee on consumers" any more than the cost of employee salaries or the cost of electricity is a hidden fee. Merchants sign detailed contracts that clearly disclose pricing and receive detailed statements that show what they paid and why. Interchange is a completely transparent, fully disclosed set of fees which merhants pass on to consumers as a cost of doing business. Only in limited cases, such as fuel, is there so little price elasticity that this is a huge problem. The argument that interchange harms consumers is dubious; it only hurts them to the extent that prices would be lower in its absence. We can safely assume that retailers will not lower prices if they get lower rates.

Merchants also downplay the enormous value they receive. Consumers like cards, shop where they are accepted, and spend more when they do. By taking cards, merchants pay 2% to get guaranteed funds, often overnight. The cost of handling checks is larger, settlement is slower, and the merchant assumes the risk of bad funds. Even cash has a significant handling cost (those armored cars don't show up for free) and is prone to loss and error.

Further, merchants increasingly accept American Express, despite its higher cost. They do this voluntarily, despite the fact that they would turn away very few customers by not doing so (how many AmEx cardholders don't also have a V or MC?). If they receive no benefit, they should drop AmEx, right?

There should be room for compromise here. I’m not saying that interchange is not too high, card acceptance rules are not too restrictive, or that the rate setting mechanism is not maddening. But when merchants call it a “hidden tax”, claim they receive no real benefit, and try to make it a consumer issue, they are being more dishonest than their adversaries.

Why Isn't Paypal More Successful?

For me, it's a dispute resolution issue. PayPal is the merchant of record for card transactions. As such, it is PayPal that must refund your money in case of a problem, not the actual merchant. That can get sticky, and while it is not always a problem, I'd rather avoid the issue from the start.

Credit Cards, Guns and Ammo: Thanks, Washington

It doesn't matter what you think of guns. This bit of legislation simply did not belong in this bill. Coburn couldn't get it passed on its own merits for the past seven years even with a more gun-friendly Senate, so he literally snuck it into a bill he knew would be passed. Its as disgusting as slipping in an earmark.