Interchange Fees
Updated August, 2010
Interchange fees are paid by merchant banks to credit unions that issue credit or debit cards. The fees help cover the considerable cost of operating and maintaining credit and debit card portfolios. While using plastic may seem as simple as swiping a card, there is a tremendous amount of hardware, software and human resources required to ensure the system operates smoothly and efficiently for consumers and merchants. While the card issuing institution receives the fee, the prices are set by the card companies themselves, most commonly MasterCard or Visa.
Consumers benefit by having increased buying power, convenience and the security that comes from being able to make emergency expenditures virtually anywhere on the globe. Merchants also reap tremendous benefits from the system. Payments are guaranteed and immediate. Consumers spend more when they have easy access to cash. Further, merchants save considerable costs by reduced fraud and theft, and lower overhead costs for counting and transporting cash. Additionally, the payment card system provides a transfer of risk from the merchant (who is guaranteed payment) to the financial institution who assumes the risk, which is one of the calculations of the interchange fee.
As you know, Congress has been considering sweeping financial regulatory reform. NAFCU is very concerned about a provision in the final conference committee product (H.R. 4173) that originated in the Senate as an amendment introduced by Senator Durbin of Illinois. The provision would allow the Federal Reserve to regulate and cap interchange fees on debit cards for issuers with over $10 billion in assets. This is highly problematic for all credit unions, regardless of asset size, as small institutions will see the market drive their fees to this new “capped” rate.
First, in spite of the small institution “exemption” from Federal Reserve regulations of interchange fees and the non-discrimination clauses, merchants are likely to covertly or overtly discriminate against credit union cards in favor of price-controlled products from large institutions with which they can negotiate profitable deals. This will be more beneficial for big box retailers, allowing them to line their own pockets at the expense of small banks and credit unions, and there is nothing in the bill to prevent it. Merchants and retailers will do everything in their power to steer consumers toward the use of cards from which they will see increased profits for themselves.
Credit unions do not have economies of scale and therefore cannot compete with the largest financial institutions issuing credit and debit cards. Credit unions are not-for-profit cooperatives, meaning that they cannot raise capital from the markets and have no stockholders. Instead, all of their capital comes from their members and is returned to their members, in the form of lower rates, higher dividends, and more services. Additionally, federal credit unions are the only financial institutions with a statutory usury ceiling limiting the rates that they charge members. If credit unions had to drop or cut back their plastic card programs because of changes in the interchange system, credit union members would likely seek these products from other institutions that may be less consumer-focused.
Second, there is nothing in the final regulatory reform bill that would guarantee consumers see any benefit from lower interchange fees charged to merchants. Merchant groups have attempted to mislead the public by presenting interchange fees as a consumer issue. It should be emphasized that neither merchants nor retailers have agreed to pass their interchange fee savings to consumers, and nothing in the amendment language mandates that they do. Instead, merchants are likely to keep their increased revenue, with zero benefit to their consumers.
Further, the Federal Reserve will prescribe regulations on interchange fees for institutions with more than $10 billion in assets. NAFCU is very concerned that the language creates a dividing line based on asset size, which arbitrarily splits the credit unions community on an issue affecting the entire industry. All credit unions are not-for-profit entities, similar in their structure and nature, and all credit unions should therefore receive the same treatment under the law. Additionally, the provision mandates that the fees be “reasonable and proportional” to the cost of the card transaction. This limitation would in no way take into account the great costs associated with the system’s technology, card fraud, and maintenance of a card network. A reduction in interchange fee income may therefore cause many credit unions to merge, as they would not be able to continue to afford these costs.
There was a lot of concern regarding the high prices charged by the card networks, such as Visa and MasterCard, leading to the adoption of this provision. However, the language will do nothing to address contracts between merchants and these giants. The provision will instead be devastating to smaller financial services providers and may force many of them to sell their card portfolios to large banks. This will only serve to make big institutions bigger, and will hurt credit unions and their 92 million members. For these reasons, NAFCU is opposed to H.R. 4173 in its entirety. Both the House, on July 30 by a vote of 237-192, and Senate, on July 15 by a vote of 60-39, passed this legislation. The president signed H.R. 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act, into law on July 21.
Almost immediately after championing the detrimental debit interchange language contained in H.R. 4173, Senator Durbin, in his role as Chairman of the Appropriations Subcommittee on Financial Services and General Government, included language in the annual appropriations process that would limit interchange fees charged to government agencies. NAFCU lobbyists argued that, like any merchant or retailer, government entities pay for card acceptance as a business expense, and derive significant benefits from doing so. Furthermore, the Government Accountability Office (GAO) has found that through the acceptance of debit and credit cards, the federal government has been able to improve the efficiency and management of taxpayer money due to corresponding reductions in bad checks and cash thefts, streamlined book keeping and lower transportation costs. Card acceptance also allows the conduct of business over the internet, which significantly reduces labor costs and permits other saving innovations, such as automated kiosks.
On July 27 the Subcommittee on Financial Services and General Government moved to mark-up the annual appropriations measure. On July 29th, at the full Appropriations Committee mark-up, an amendment was offered by Senator Susan Collins of Maine that would remove the provision requiring federal government agencies to get the lowest commercial interchange fee and replace it with a Government Accountability Office study of its potential impact on credit unions and small banks. At NAFCU’s urging, and with notable opposition from Senator Durbin, the Collins amendment was adopted by voice vote and the original language was stricken.
In other notable developments, on July 29 the House Small Business Subcommittee on Oversight and Investigations, held a hearing, “The Impact of Interchange Fees on Small Businesses.” Chaired by Rep. Altmire of Pennsylvania the subcommittee heard from several witnesses, including the vice president of lending for Clearview Federal Credit (Moon Township, PA), about the likely impact of the debit interchange price caps prescribed in the Dodd-Frank Wall Street Reform and Consumer Protection Act. NAFCU has urged the Fed, in considering any price cap on debit interchange, to take into account all incremental costs involved in facilitating transactions including the set-up and maintenance of payments systems and costs related to fraud prevention.
Related Files
Interchange Fee Comment letter to House Small Business Subcommittee on Investigations and Oversight - July 29, 2010
Interchange Fee Comment letter to Senate Appropriations Committee - July 28, 2010
Testimony of John Blum before House Judiciary Committee April 28, 2010
Interchange Fee Comment Letter to House Judiciary Chairman John Conyers - June 10th, 2009
Interchange Fee Comment Letter to Senate Judiciary - June 12th, 2009
Testimony of John Blum before the House Judiciary Committee
GAO Report on Interchange Fees in Australia. This report by the Government Accountability Office found no evidence that merchants passed on savings to consumers after Australia instituted price caps on interchange fees.
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