The interchange win

By Felix Salmon
June 21, 2010
looks like interchange-fee regulation has made it through! That's great news, and I'm not particularly concerned about the compromises that Dick Durbin made. The Fed can now consider fraud costs as well as transaction costs in setting the level of interchange fees -- that's OK, although it'll probably just push further down the road the day when the US will finally embrace the low-fraud EMV standard.

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It looks like interchange-fee regulation has made it through! That’s great news, and I’m not particularly concerned about the compromises that Dick Durbin made. The Fed can now consider fraud costs as well as transaction costs in setting the level of interchange fees — that’s OK, although it’ll probably just push further down the road the day when the U.S. will finally embrace the low-fraud EMV standard.

Kevin Drum “wouldn’t mind seeing some regulation of credit card interchange fees as well”, but that’s bound to happen, de facto, now that merchants are free to offer discounts to people paying with cash or debit: if credit-card interchange fees stay high while debit-card fees fall, then merchants will simply start offering broad discounts to anybody using cash or debit, essentially forcing customers to pay extra for all those frequent-flier miles and cash rebates.

The one place this might end up hurting consumers is in the travel area generally, and plane tickets in particular. I feel that we’re bound to move to a Europe-style state of affairs where it costs a significant extra sum to buy tickets on a credit card, and that as a result a lot of people will use debit cards instead. When they do so, they’ll lose a lot of consumer protections in the event that their airline goes out of business or otherwise fails to honor the ticket they’ve paid for.

Still, it always was a bit weird that we got these protections for “free”. I guess that going forwards it’s just going to be a lot more obvious how much they really cost. And that a lot of people, if they’re buying some kind of service to be delivered in the future, are going to quite deliberately use their credit card, even if they have the money in their checking account to use their debit card.

I think too that if discounts-for-debit catch on, that’ll have a positive effect in terms of minimizing the degree to which people delude themselves that if they buy this item today, they’ll be able to pay it off in full before the monthly credit-card statement is due. Mike Konczal sees

something unhealthy about a payment system that blurs the line, on purpose, between transactions and revolving lines of credit. The system is set-up to encourage you to use credit as much as possible, and then pay that credit off later. This is not an accident. The common phrase among credit card company people is that people are “sloppy payers”, and these sloppy payments function as a major profit center for businesses. This system also transfer money upwards in a regressive, tax-free manner and distorts prices so that shareholders of financial companies can get a cut.

The new interchange rules will definitely put a dampener on this kind of activity, although they won’t eliminate it entirely. If you want to use a credit card, that’s fine, but you’re going to have to want to use your credit card, and the distinction between credit cards and debit cards is going to me much more obvious. That’s got to be a good thing in terms of improving personal finances across the nation.

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Comments
2 comments so far

I like the idea of this, but I have none of the faith that you do in the idea that businesses will pass the “savings” of using cash or debit on to customers. Right now, many places break the credit card-merchant agreement in order to charge people extra fees for using credit cards; if interchange fees on debit cards drop, I wonder if they won’t just increase the charge on credit transactions, meaning they’ll be making more from regular purchases while the benefits remain the same for customers.

In fact, the only place I expect to see this make a huge pocket-book difference right away is at gas stations, where “cash only” has been a discount offered for years. Hooray?

Posted by jennkepka | Report as abusive

Jenn – I agree, I am skeptical that businesses will pass the savings on. I expect that businesses will actually have a really hard time monitoring and managing their card mix.

The friction of looking at a customers card, determining what kind of card it is, informing the customer of a surcharge, asking the customer to use a different card, charging the surcharge, etc is pretty steep and I doubt many retailers will bother.

Even if that interaction is smoothed out with very good implementation within POS software, influencing the card mix will be hard for the retailers to solve.

Most small and mid-market businesses don’t actually know their card mix. One reason is that many of the common billing formats that the credit card processors use (such as tiered billing and ERR) obscure the actual card mixes in order to allow the processor to hide the magnitude of the markup they are making above interchange.

For other people who are geeks about credit cards and interchange, a colleague of mine and I put up a little mashup at http://truecostofcredit.com We used a few data sources, including a BIN number database (the BIN number is the first 6 numbers of your credit card) and the interchange guidelines published on visa and mastercard’s websites. It’s a fun way for consumers to get a sense for how much their personal credit card costs the business when they shop.

The difference between using a debit card and credit card can already be pretty big. Ironically, most consumers tend to use debit cards for smaller purchases and debit cards also tend to be more expensive for smaller purchases (since they have a greater per-transaction component).

Posted by seanharper | Report as abusive
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