Why we should cap interchange fees

By Felix Salmon
November 25, 2009
Keith Bradsher's NYT story on Australian credit-card fees kicks off with an eye-opening anecdote:

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Keith Bradsher’s NYT story on Australian credit-card fees kicks off with an eye-opening anecdote:

When Steve Franklin bought four plane tickets on Qantas last June, he faced an unexpected expense: a surcharge of 7.70 Australian dollars on each of the 136.70 dollar ($126) tickets — just for using his Visa credit card…

Now, as Congress debates how to rein in credit and debit card companies in the United States, Australia’s experience is being pointed to as an example of just how tricky that can be: for one thing, if regulators limit one fee or rate, banks are likely to find another way to keep revenue flowing.

It’s not until the very end of the 1,400-word article that Bradsher sees fit to inform us that “no one is suggesting outright surcharges for paying with a credit card in the United States” — and he never mentions that airline surcharges are a very special case, because of those holdback charges.

That said, if you start introducing legislation which decreases the amount of money that credit card companies get from hidden charges, it’s almost certain that you will increase the amount of transparent charges that credit-card companies will start imposing. And when people start seeing new charges, they use their cards less:

The main consumer federation in Australia, Choice, says that while regulations here have had a few unintended consequences, they have created incentives for retailers and consumers alike to rely more on debit cards, which have much lower processing costs, instead of credit cards.

That’s already happening in the US, and the trend will accelerate if new legislation gets introduced, and it’s a good trend to see accelerate — especially now that banks are being banned from imposing unasked-for overdraft fees on debit-card purchases. (Mike Konczal has a good post up today on the way that hidden fees can force invidious choices.)

Interchange fees on both debit cards and credit cards are rising, and in general it’s a bad thing when banks start making billions of dollars from hidden fees that very few people ever see. Much better to cap those fees and force the banks’ income sources out into the open where consumers can make their own decisions about whether and how they want to pay them. One consequence is likely to be that total credit-card indebtedness will fall. And we should all be happy about that.

8 comments

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Being in the mercahnt payment processing industry for over nine years post’s like your’s drive me nuts. Before you make a comment about capping I/C fees you really should understand the whole merchant payment process first. You cliam the banks are charging merchants hidden fees, this couldn’t be more further from the truth. A merchant pays thier Acquirer, not the banks, a discount fee on each transacation which is fully disclosed when they sign thier agreement, the card issuing banks charge the Acquirer the I/C fee. Merchants complian about the cost of accepting credit cards but what they don’t tell you is how much revenue those cards have generated.Capping fees would not save the consumer anything because there is no guarantee the merchantns would pass this savings onto the consumer.Capping I/C would cost the US tens of thousands if not hundreds of thousands of jobs.In order to not mislead your readers I’d be happy to enlighten you on the whole I/C proccess and make this blog more accurate

Posted by ken | Report as abusive

Ken, I’ve worked in the payment card industry for 19 years–14 for credit card banks and 5 for a merchant–so maybe I’ll know what I’m talking about. Your point about acquirers is completely irrelevant–it doesn’t matter how the fee gets split up–The fact is that whether they are going up with rate increases, assessment increases and new fees–THEY ARE GOING UP. You reference how much revenue the cards generated. Are you kidding me? The cards did not generate one incremental dollar of sales. Consumers drive sales–not a tender type. Do you buy two Big Macs at McDonalds instead of one because they take Visa? Do you put 20 gallons in your car instead of 10 gallons because Shell stations accept MasterCard? Do you buy two dozen eggs instead of one dozen eggs because Kroger accepts AmEx? Wow dude, you have been drinking the koolaid too much and you need to get some common sense. Interchange would cost tens of thousands of jobs–maybe a hundred thousand of jobs? Really? Well with merchants saving $48 billion in interchange, they could hire every single one of those unemployed and pay them $480,000 a year. I think they would take that switch. You want the facts? Step #1: Stop listening to the party line is pumping out. Step #2: Look at the data and do the math. All it takes is some common sense to show you the current system in the US is broken.

Posted by CommonSense | Report as abusive

Once again, Salmon takes the choice of using the heavy hand of government intervention instead of letting the market itself sort it out. Which it has been doing for some time. Many businesses wont take Amex because of high fees. Sam’s Club won’t take Visa. Many colleges won’t take a credit card payment for tuition, room and board without charging a 3% fee for paying that way.Salmon and the Democrats in Washington intrude and just make things worse.

Posted by Davein Philly | Report as abusive

Dave, be honest. You may live in Philly but you work in Delaware. Guess who else won’t take credit cards…THE BANKS! Isn’t it interesting that banks preach about how convenient and beneficial credit cards are, but I can’t use one to pay for my mortgage or my car loan. I guess they believe that credit cards are good enough for every other business to accept, but they are too expensive for the banks. These banks are talking out of both sides of their mouths and looking for handouts from the government while they drive consumers and small business into bankruptcy. Just like hedge funds, Visa and MasterCard have proven that self-regulation does not work. By the way, don’t try to frame this as a Republican vs. Democrat issue. Congressman Shuster, a REPUBLICAN from your home state of Pennsylvania has sponsored a bill to reform interchange. People from all parties recognize that it is time for some significant reform.

Posted by CommonSense | Report as abusive

commonsense, You are whining that the banks won’t take credit card payment for a mortgage or car loan payment. That would be paying a loan with a another loan! And a UNSECURED loan at that! Banks arn’t that stupid. Especially if it is one of their own credit cards that you can easily default on. We are talking about everyday purchases here, including the rare purchase of furniture or a TV. Come now , use some common sense here. And not all Republicans act like Republicans, some act like RINO’s such as Arlen Specter.

Posted by DaveinPhilly | Report as abusive

Dave, great point! I am whining. Banks are not so stupid as to use one loan to pay another loan. They are MUCH smarter than that. Hold on a second, then why three years ago was every bank in the US encouraging everybody to payoff their credit cards (one loan) with their home equity (another loan)? Maybe banks are that stupid! Then why in every credit card solicitation I get, do I get a convenience check so I can transfer my credit card balance from my BofA credit card to my new Chase credit card? That’s paying off one loan with another–Why do they send me a convenience CHECK? Why don’t I just give them the account number and they process it as a credit transaction so I can get my miles? Banks ARE STUPID enough to pay off a loan with another loan. Put down the koolaid that the banks are giving you, step back, look at the facts and start thinking for yourself. Interchange fees are out of control. Republicans, Democrats, Libtertarians and the Green Party will all agree on this once they stop listening the grabage the Lobbyists are feeding them and look at the facts!

Posted by CommonSense | Report as abusive

I am a small merchant 90% internet based, so most of our business is card not present. I have seen my interchange fees increase four fold in the last couple months. I guarantee you that I cannot increase my prices to cover the cost of interchange fees. My interchange fees the last two months have been more than the discount fee, absolutely nuts, and your comment that debit card fees are less is completely wrong. When I called my processor to complain they told me that the majority of the fees were from business debit cards. I would quit taking cards but then I’d have to close the doors, that should improve the economy. Something needs to be done, these card issuing banks are the same ones my tax dollars bailed out, where’s my bailout????? Wait maybe if I close my business I can get on welfare and I would get my bailout then.

Posted by B.O.NotthePrez | Report as abusive

I have a stress reduction center featuring affordable massage. We are in our fourth year. During the first three years, I felt it was important to provide every convenience. My processing fee in ’07 was roughly ten grand. Been gradually phasing in more pin-based, checkcard/ATM/Debit transactions since then, and that’s got my cost down 30-40%.

In ’07, only the small banks were charging their custumers to use their debit cards as debit cards, or paying them to to have me run their debit as a credit. Since the crash, the large banks have joined the fray.

If my customers are buying something with future earnings, it makes sense for me to participate in the cost of their loan. Paying 3% for something that helps generate the sale is a good deal. However, most of my clients don’t need to borrow money to access a $55 service. Most of the ones that do, have already maxed out their cards.

My current I/C expense of $700/month is rising, even as the percentage of debit transactions is rising becuase of the banks pushing their customers to ask me to run their debit as a credit.

Transaction fees make up 90% of my marketing expenses. The other 10%, or $70 goes to web-site maitenence and Constant Comment, an email marketing service. At some point in the near future, I will stop accepting all cards accept pin-based debit.

Australia’s concept of limiting interchange fees to one half of one percent is a great idea. Did you know that their economy has been growing steadily through ’08 and ’09?

We have built up financial service industies above 40% of the national economy. How crazy is that? It is double the historical norm, and bound to drag down future potential. The general population is becoming aware that banking does not have any conscious leadership, which could ultimately result in more socialized banking. We all own some of Citi and AIG. We’ve already crossed the line into socialized banking, and the trend will likely continue.

The debit reward trend will ultimately backfire on the banks. Stores that give great pricing will follow Costco’s lead.

Posted by c-touch | Report as abusive