Those rising falling interchange fees

By Felix Salmon
October 19, 2009

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

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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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