Credit card interchange fee datapoint of the day

By Felix Salmon
July 16, 2009

Andrew Martin reports:

At Target, for example, interchange fees represent the second-largest store-level expense, behind payroll. The costs are similarly eye-popping at Home Depot, where officials say they top the price of health care insurance for employees. “The amount of money we’re spending on interchange would put 10 associates in each of our stores,” Dwaine Kimmet, vice president of financial services for Home Depot, said at a recent conference on credit card fees.

Martin is right that lower interchange fees might not mean lower prices for consumers. But they would improve value in other ways.

Alternatively, we can just let the market take care of things, as Floyd Norris proposes:

Make it clear that credit-card companies cannot force merchants to pass the fees on to their customers — This coffee is $1.50 if you pay cash, or $1.79 if you use plastic. If Visa will offer a better deal to the merchant than AmEx does, maybe a Visa purchase should be $1.69. A little price competition would be welcome.

There’s a good reason that sales taxes are lower in the US, where they’re visibly added on to posted prices, than they are in Europe, where they’re invisibly included in posted prices. Maybe the first thing we should do in the war against interchange fees is simply make them visible.


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In California, it’s illegal for a retailer to add a surcharge for a credit card… but it is legal to offer a cash discount. This law would have to change for your proposal to be legal in CA.

Posted by Silicon Valley Chuck | Report as abusive

Most credit card agreements between the merchant and the card company prohibit such fees. They also prohibit minimum charges to use a card. I suspect that even large retailers don’t have a lot of bargaining power to adjust the standard contact. Home Depot would probably lose a lot of business if they didn’t accept Visa, so they’re somewhat stuck.

Posted by MichaelB | Report as abusive

I know it isn’t necessarily true for big retailers, but the card companies often force small businesses to agree to charge the same price regardless of payment type in order for the business to be able to accept cc at all. So the market doesn’t get the chance (usually businesses just won’t accept the higher players like diners, amex).

How do the total costs of credit cards and cash compare. Note that cash has to be repeatedly counted, carried, stored in safes, moved in trucks, lost to thieves ….

Posted by Sam Penrose | Report as abusive

the hoagie place at my college charged an extra 50 cents for every credit card purchase. it definitely changed my behavior, even though they probably profited off of credit card transactions with a surcharge lke that.

The simple way to reduce interchange fees is to do what Australia did a while back. Make it illegal for credit card issuers to prevent merchants from providing a discount for cash.

Credit card agreements prevent merchants from offering a discount for cash. If merchants could provide a discount for cash, the use of credit cards would diminish significantly, and interchange fees would drop similarly.

Posted by enplaned | Report as abusive

Once again you’ve missed the point. Interchange is a problem in search of a solution. Mega retailers want to line their pockets, not pass savings to us. And if it was true that savings would be passed to us, then Congress should limit everything that affects price–not just transactions fees.
Your logic seems to suggest that bad policy in the name of consumer good is a positive gain.
This isn’t liberal view vs. conservative or the big bad banks…this is business on business crime that will only hurt small credit unions like mine.

Posted by JC | Report as abusive

Im not a fan of interchange but I am a fan of sales. When a customer uses a credit card they tend to spend more and worry about their bill later. If we were to get rid of credit card interchange or do somthing to reduce credit card usage I think you’ll see companies start losing sales/profits.

So what to do? Add more competition. Create a another payment network. Someone out there with mucho bucks should create a another network to compete with with amex, visa, mc, discover. More competition would force these guys to bring interchange down…my two cents….

Posted by Angiebooks | Report as abusive

Martin is right that lower interchange fees might not mean lower prices for consumers. But they would improve value in other ways.

Could you elaborate on the “other ways” it would create value? There is no follow up on this claim, which seems central to your argument that interchange is an issue that needs to be addressed by government.


Posted by ANIL | Report as abusive