Capital Commerce

Interchange Fees: GAO Recommends Caution on Regulation

November 19, 2009 RSS Feed Print

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The Government Accountability Office just issued a report on the issue of rising interchange fees for merchants who offer credit card services. As I wrote in a previous article, merchant groups have got the ears of certain members of Congress, and regulation is on the table that would theoretically lead to lower interchange fees for merchants and lower prices for consumers.

But, as I explained, the issue isn't that simple. There are several myths that both sides (merchants on one side, credit card issuers on the other) are bandying about to make their individual stance look like the unalloyed good.

The GAO report serves to show how complicated interchange regulation is. But it does provide some notes of caution that Congress should heed before it acts.

1. The GAO basically agrees with my suggestion that it's impossible to determine if a lower interchange fee would be passed onto consumers.

2. In the U.S., small credit unions are concerned that limitations on interchange fees will reduce their ability to extend credit to customers. The GAO consults the example of Australia (which implemented interchange regulation) to see what would happen here:

Australian officials reported that since their reforms were instituted, the number of credit card accounts in Australia has continued to increase and smaller credit unions have remained in the credit card business, albeit with some of their operations outsourced.

This doesn't shed much light on the subject. So credit card accounts increased, but would they have increased more without regulation? Smaller credit unions "remained" in the business, but was it to a lesser extent than they otherwise would have?

3. The GAO report makes clear that most merchants in the U.S. want a cap on interchange fees. But as I reported, there is a less aggressive regulatory approach: Allow merchants to negotiate with credit card issuers, and add surcharges on certain cards if need be. But besides the obvious problem consumers would have with new charges being slapped onto their cards, the GAO mentions bigger practical problems with that approach:

Finally, the proposal to allow merchants to directly negotiate with issuers raised several issues from the industry participants we interviewed. They said that such negotiations could harm small merchants and small issuers, which do not have as much leverage as larger participants and, in some cases, lack the resources to participate in bargaining sessions. In addition, prudent exercise of this option would require an exemption from federal antitrust laws, which include provisions designed to protect consumers from the consequences of agreements in restraint of trade. DOJ officials have expressed their historical opposition to efforts to create exemptions to antitrust laws, stating that these exemptions should be used only in the rare instances in which a public policy objective compellingly outweighed free market values.

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Local, community banks and credit unions collectively earn only 20% of the card transaction revenues earned, while the top 10 banks keep 80%. It seems to me this fact should be considered along with the need of US merchants and consumers to have a card option to use that is affordable. Considering leveling the playing field between US and foreign exchange rates is a good idea in an international retail, online market that grows despite downturns in brick and mortar retail sales.

Jim Simpson of OH 10:21AM May 10, 2010

Brian from Florida makes an assumption that retailers will pass along savings from any reduced interchange fees to the consumers. He also makes the assumption that card issuers will not pass along more costs to the consumers if interchange fee income from merchants is reduced. Both assumptions are false.
If a local utility reduces energy costs to retailers, do those retailers then reduce the costs of their products and services to their consumers? You can be the judge on that but I highly doubt it. Energy costs are an associated cost of doing business, just like costs associated with someone paying for a purchase. At least an interchange fee is associated with an actual sale transaction.
Card issuers do have costs associated with issuing cards, processing cards, funding transactions, and picking up the tab on fraud connected to card transactions. Card issuers also have to pay power bills as well. It is ironic that a good deal of the data breach losses are due to merchant mishandling of sensitive data. If interchange income is reduced to card issuers, card holders will bear additional costs to own and use credit and debit cards.
I doubt that the increased costs to consumers from card issuers will be matched by reduced costs on goods and services from the merchants. The net effect - more costs to consumers.
This entire interchange fee dispute falls under the category "if it ain't broke, don't fix it".

Greg Olmsted of AL 5:57PM February 17, 2010

Senator Dick Durbin recently talked about how the U.S. banking industry ‘owns’ Washington. The GAO report on interchange fees proves Senator Durbin is correct.
The average interchange fee in the U.S. is seven times the interchange fee set by Visa and MasterCard in countries throughout the rest of the world. Using 2008 figures, if the interchange fee charged by credit card issuers was decreased (via comprehensive credit card reform legislation) from the current 2.10% to 0.60%, the result would be an annual savings of approximately $34.3 billion for U.S. merchants and consumers. Credit card issuers could retain 0.3% as a processing fee, the remaining 0.3% could be a “tax” used to fund a Natural Disaster Trust Fund (NDTF). In 2008, this would have generated $6.86 billion in funding for a NDTF.
Let’s be clear. The interchange fee is a hidden tax, just not a tax subject to political control or for which there is any discernible social benefit. Decreasing, and imposing a transparent tax on, the interchange fee would have the same stimulus effect of a tax break, but without an impact on the federal budget.
The following article discusses how comprehensive, standardized, simplified, and transparent credit card reform legislation may fund a Natural Disaster Trust Fund.
http://www.csnews.com/csnews/images/pdf/creditcardreform.pdf

Brian J. Donovan of FL 7:15PM November 19, 2009