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 and Mastercard, 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.