Those rising falling interchange fees

By Felix Salmon
October 19, 2009

Something smells very fishy to me about this chart in today’s WSJ:


How can fees be going down as a percentage of transactions if they’ve been rising sharply in nominal terms? The total amount of goods bought on plastic isn’t rising that fast. The WSJ doesn’t help answer the question, preferring instead a simple he-said she-said:

Debit cards carry lower interchange fees than credit cards, but fees on those cards are rising as debit cards become more popular.

Merchants in the U.S. paid an average interchange rate of 1.82% per transaction last year, down from 1.93% in 2005, according to the Nilson Report, bolstering the industry’s argument that fees are falling.

Huh? In once sentence we’re told that fees are rising, while in the next we’re told that fees are falling. Not helpful, WSJ.

The answer, I think, is that the second chart is rather misleading. Consider a world where:

  • Credit-card fees are higher than debit-card fees, and are rising.
  • Debit card fees are also rising.
  • Debit card usage is rising, while some things which used to be bought on credit cards are now bought on debit cards.

I suspect this is exactly what we’re seeing in the chart above. The “falling fees” chart is really just a chart showing that people are moving from credit cards to debit cards. (And remember that debit cards don’t come with cash-back rebates, or loyalty miles, or anything like the amount of purchaser protection that credit cards offer, all of which things are paid for by interchange fees.) Fees are rising across the board, but the secular move into the world of debit cards, which were all but nonexistent a few years ago, allows the industry to claim that fees overall are falling.

I’m waiting to hear from David Robertson of Nilson Report, and I hope he’ll be able to give me some more figures on all this. But my gut feeling is that the second of the WSJ’s charts obscures much more than it reveals.


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It strikes me that online sales boomed in the same timeframe. Are those at a lower fee?

On top of that the WSJ left out any mention of the anti-trust lawsuit settlement with Walmart and other retailers over merchant fees. Then there is the EU antitrust settlement on th same issues.

Posted by stratton | Report as abusive

You may find this article benchmarking US interchange rates with the UK of interest: gital_money/2009/10/what-doesnt-add-up.h tml

But did the switch towards debit cards begin circa 2005? Sounds a little early. The c/card part was in full swing until relatively recently – early 2008? Certainly in 2006/2007 balance transfer and new card offers were flooding our mailboxes.

Our business takes c/cards (not debit cards) and our fees have been stayed unchanged or risen ove the entire range of the chart shown.

odograph – the risk of chargebacks is generally higher with online transactions, ISTR therefore their rates are higher (my business is mail/telephone, therefore lowest rate – from our processor anyway)

Posted by JB | Report as abusive

This is a variation on Simpson’s paradox. _paradox

Posted by Glenn Cassidy | Report as abusive

Well, you did manage to explain the curious chart, but I don’t quite understand your outrage with the journal or your beef with the absolutely true statement that aggregate fees as a percentage of total spend are falling. There’s a mix shift from credit to debit, debit on average has lower interchange and … you’re a Lebowski, I’m a Lebowski, what’s your point? The total cost to retailers of electronic transactions is still falling, which is what the chart shows and the text says.

Consumers seem to be too dim-witted to understand that using a debit card is leaving money on the table, as they could be getting 30 days free credit and points and miles and whatnot. But hey, that’s their choice I guess. This whole interchange debate is tempest in a test tube, a war of one lobby against another, with congress proposing to shoot the consumer in the foot for comic relief. If they cut interchange retailers aren’t going to pass on the profits. Check out the Australian Central Bank’s study that bears this out.

Regulating interchange is just a way of transferring money from the consumer (lower rewards) and the banks (lower interchange) to the retailers (lower merchant discount rate). I don’t care whether it’s the banks or the merchants that end up richer. All I care about is the fact that cutting interchange will have the inevitable effect of making the informed consumer poorer, which is exactly what happened in Oz. What’s more, the uninformed consumer, the guy already using debit, isn’t going to benefit either.

Usually you’re on the side of the consumer, so I wonder whether you’ve thought this through entirely, or whether I’m missing something here.

Posted by BwO | Report as abusive

Many former “borrow and spend” consumers use debit cards to “not use credit.” It’s part of their “discipline.”

What would really be interesting is a step-by-step study of how American culture went from frugal savers to debt-gorging spenders.

Posted by VennData | Report as abusive

It is indeed debit card transactions becoming a bigger part of the mix, in particular “PIN-Based” debit card transactions. They have the lowest merchant cost,with “Signature-based” debit next and Credit Card being the most expensive (and specially registered BINS, which are part of your credit card #, of “Reward Cards” being the most expensive in that category). That’s why the best managed merchants try, even if subtley, to encourage Pin-based debit transactions.

There is much baked into this topic, but the real interesting part will be, if interchange is forced down, how long can American Express maintain a pricing (in terms of their earnings) advantage from their highest-in-the-market interchange rate. If interchange is reduced for credit cards that will apply to only Visa and MasterCard (reasons to much for this post), then reward-seeking, higher-spending card holders will likely move to Amex as they will have a much better value proposition. Interesting to see if merchants abandon Amex is droves or stay with them for that demographic (and moot their point in the lawsuits).

The real solution is to allow merchants to decide if they offer different prices for different payment methods. Then they can decide if cash and checks really are worth offering a discount for (and, loving unintended consequences, does the government really want to encourage cash-based transactions… harder to verify, easier to fudge on the tax reporting).

You don’t mention the fact that the Y-axis of the second chart doesn’t start at zero, thus, the trend is far smaller than the chart makes it look. The fall from peak to current level is only about 10%. That makes it seem quite possible that amounts sold on plastic are indeed rising that fast. And in fact the slowdown in growth of total fees happens about the same time as the (small) decline in percentage fees.

Posted by chris | Report as abusive

While I fully appreciate that the point of this post is more about the relative accuracy in the presentation of the statistical information contained in the WSJ report (and I applaud you for considering that) I would like to make one small correction:

The statement that “…remember that debit cards don’t come with… anything like the amount of purchaser protection that credit cards offer…” is incorrect.

For example, while different regulations may address consumer protections (typically Reg Z for credit cards and Reg E for debit cards,) over time these two regulations have come to essentially mirror each other when they address consumer liability. Since the mechanics of the credit and debit systems differ at the issuer-end of the infrastructure (even though they SEEM the same at the merchant end of the process) the METHOD in which those protections are administered often differs – but the EXTENT of the protections are nearly identical.

Posted by Jeff Schroth | Report as abusive


Nice catch on this. I believe the anomaly has to do with the data source, the Nilson Report, began combining Visa’s PIN-debit interlink network figures in the “average rate” chart in the 2006 figures. Interlink PIN debit interchange rates average in the 1.00 – 1.10%% range, signature debit 1.40-1.50%, credit 2.00 – 2.10%. Visa’s Interlink is the largest PIN network with about 40% transaction share.

MasterCard has an online PIN network as well, Maestro, though its U.S. volumes are negligible as it functions as a back-up network to regional PIN networks in the U.S.

Posted by Mike McCormack | Report as abusive