The interchange-fee rip-off
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.
Many 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.