The interchange-fee rip-off

By Felix Salmon
January 5, 2010
criticized a WSJ story on interchange fees for not making it clear that they were rising rather than falling. The WSJ's chart showed interchange fees falling as a percentage of each transaction, and settled on a he-said, she-said approach where first fees seem to be rising and then they seem to be falling:

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Back in October, I criticized a WSJ story on interchange fees for not making it clear that they were rising rather than falling. The WSJ’s chart showed interchange fees falling as a percentage of each transaction, and settled on a he-said, she-said approach where first fees seem to be rising and then they seem to be falling:

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.

VISA1web.jpgMany thanks, then, to Andrew Martin at the NYT for publishing the missing chart today. As I suspected, both credit-card and debit card interchange fees are rising, with the fastest-growing segment of the market — debit PIN transactions — positively soaring.

There is no good reason whatsoever for the debit-card interchange fees to be rising like this, especially when they were often negative a few years ago. It’s almost funny, watching Visa executives tying themselves up in knots trying to justify the indefensible:

Visa officials said the costs of debit for merchants had not gone down because the cards now provided greater value than they did five or 10 years ago. The costs must not be too onerous, they say, because merchant acceptance has doubled in the last decade.

The fees are “not a cost-based calculation, but a value-based calculation,” said Elizabeth Buse, Visa’s global head of product.

How, exactly, does a debit card now provide “greater value” for merchants than it did in years past? Visa doesn’t say. And of course we know exactly what the “value-based calculation” is that Buse is talking about: debit cards are cheaper for merchants than credit cards, and so long as there’s a spread there, Visa and Mastercard will see it as an opportunity to hike prices.

This chart also helps to explain why the chip-and-PIN system which is so ubiquitous (and, indeed, compulsory) in most of Europe will never catch on in the US unless and until regulators force the issue. It’s much more secure, but it’s also much less lucrative for banks, who love to be able to charge enormous fees for forcing people to sign credit and debit card bills with a pen.

Martin doesn’t seem to have talked to any regulators for his story, but I hope they’re watching this fiasco closely, and are minded to crack down on it. There’s no reason at all that Visa and Mastercard should be soaring in value in a world where payments should be completely commoditized: it’s a monopoly rent, and I look forward to this particular trust being busted sooner rather than later.

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16 comments so far

The Times’ chart goes back farther, but a recent Fed report has more detailed data on different types of cards that’s pretty interesting. 2009/200923/200923pap.pdf — the chart’s on page 75, but there seems to be a lot of other good stuff in there.

Particularly notable how once the courts prevented Visa from making forcing merchants who used its standard credit cards to also accept high-interchange debit card, it soon found another way to leverage its market power by forcing merchants to accept ‘Premium’ credit cards with higher fees. On the Times graph, that’s a missing line above all the others, and still going up.

Posted by BGMS | Report as abusive

And we don’t think the antitrust laws apply because….?

Posted by Dollared | Report as abusive

Who is it that accepts fatuous pablum from Visa executives? “Normal people” know Visa isn’t adding a value but rather is simply a commodity and should be regulated as such. The data isn’t transmitted over cables owned by Visa.. the machines doing the card reading aren’t owned by Visa.. where’s the value add? A single computer science undergrad intern could code all the necessary hardware and software in under a week.

Much like all “financial engineering,” Visa adds extraordinarily little value and should be heavily regulated. [ I didn't say NO value.. i said very, very, very little. ]

Posted by Unsympathetic | Report as abusive

Of course the reason they raise their charges is because they can.

I don’t understand why they wouldn’t be able to raise the pin-based intercharge if we went to chip-and-PIN. Can you elucidate this a bit?

Posted by dWj | Report as abusive

The chip-and-PIN debit card is actually incredibly inconvenient, compared to a regular pen-signed credit card.

In any case, I am thinking of getting an Amex card. The interchange fees, I expect, will be somewhat enormous.

But then I suppose that’s how Neiman Marcus offloads its returns risk; by buying insurance on it through interchange fees.

Posted by SGKingsley | Report as abusive

I know it does cost something to process transactions, and that it also costs the business if they have to process a paper check. That is part of the cost of doing business. The problem as I see it is a monopoly by VISA. When one entitiy has an inordinate market share then anti trust laws should automatically kick in. Our problem as I see it is Government Officials and Departments are up for sale to anyone with money. This is a more pressing problem than healthcare, terrorism, or the down economy. The unwillingness by Government to clean up its act normally leads to its downfall, as shown in many nations on many occasions.

Posted by fred5407 | Report as abusive

I use to be Paypal, Google chekcout customer acception credit card online, did no know about this 800 lb gorilla the Interchange fee charged by visa and mastercard , switched to these theives and now finding out these are day light robbers , then the paypal and google checkout and I am not happy at allll

Posted by sanejan | Report as abusive

Left out of Andrew Martin’s story is the role the FDIC and the House Financial Service Committee played in maintaining the high interchange fees and decreasing competition.

In 2005, Wal-Mart filed an application with the FDIC to buy a Utah based Industrial Bank. Wal-Mart stated in its application and press releases that it wanted to own the bank to save on transaction fees from debit cards, credit cards, etc.

Knowing the competitiveness of Wal-Mart, it would use its transaction fee savings to lower prices, which would have put tremendous pressure from competing merchants on banks, Visa and Mastercharge to lower their transaction fees.

Unfortunately, for the consumer, the FDIC, the Democratic controlled House Financial Services Committee and the Independent Community Bankers Association opposed Wal-Mart’s application. The FDIC did not approve the application.

The reason fees are high in banking products and services is that our banking regulators and Congress do not want low cost competitors in the banking industry and stop the competition that would lower consumer costs. When voters complain, they pass price fixing legislation, but do nothing to solve the underlying problems.

The tight regulation of the consumer banking industry leaves little opportunity for real price lowering competition. If Congress and the banking regulators allowed the consumer banking market to be competitive, prices would go down and services would improve.

Posted by MiltonRecht | Report as abusive

banks are desperate for fees due to the defaulting mortgages they hold which isn’t getting any easier. US housing will continue to plague the markets in 2010 as strategic foreclosures rise from the current 25% of total foreclosures they are today. Why stay in a mortgage when the rest of the neighborhood is renting at 1/3 your monthly cost? Read a wild California foreclosure story at

Posted by voomies | Report as abusive

Having been in the credit card processing business for many years I agree that Visa does little except advertise.
We need more competition in this space if we ever want to see interchange rates go down. Visa was sued and lowered pin based debit rates only to go ahead and push signature debit and raise fees there.

Posted by musicperson75 | Report as abusive

Relax folks! Soon some legal firm will file a class action suit and the small retailer like me will ultimately get a $23 check for “excessive” fees and the attorneys will once again walk away with millions. Three years later the process will be repeated. Attorneys get filthy rich and the small retailer gets taken to the bank (pun intended)!

Posted by ZachPP | Report as abusive

You know you don’t have to deal with the High Interchange Fees. There are ways around it if you have the right people negotiating these fees.

My company Decada Financial Group has a program that deals with merchant providers to significantly reduce the costs.

If you want to know more about this, call or email me.


Alex Thavorn
877-533-2232 x 103

Posted by Decada_Group | Report as abusive


Posted by jamielaw | Report as abusive

Hi5Lawyer offers lawyer marketing for attorneys and lawyers.

Posted by jamielaw | Report as abusive
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