Interchange Fees
Updated February, 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.
Despite these benefits, merchants successfully lobbied the House of Representatives and the Senate to introduce legislation that would artificially cap the fees they pay for the benefits provided by the electronic payment system. Rep. John Conyers (D-MI) introduced H.R. 2695, the Credit Card Fair Fee Act of 2009 on June 4th, 2009, while Sen. Richard Durbin (D-IL) introduced S. 1212, a similar measure, in the Senate on June 9th, 2009.
The proposals would exempt merchants from the nation’s antitrust laws by allowing them to discuss and decide among themselves what price they will agree to pay to accept credit and debit cards. This practice is more commonly known as collusion and, absent the exception provided by the proposal, would be a patently illegal violation of antitrust law.
The Senate proposal would also authorize merchants to bring the issue before a newly created three judge panel if they were not able to negotiate a lower price. S. 1212 directs the three judge panel to set the price for interchange fees “that most closely represent the rates and terms that would be negotiated in a hypothetical perfectly competitive marketplace.”
In the 110th Congress, the House Judiciary Committee approved interchange legislation closely resembling H.R. 2695 by a vote of 19-16 with five members abstaining. Those voting against the bill included eight Democrats and eight Republicans. The fact eight members from both sides of the aisle voted against the bill is indicative of the serious problems with the proposal, even with substantial changes made during the mark-up process.
NAFCU strongly opposes H.R. 2695 and S. 1212. Credit unions offering credit and debit cards do so at considerable cost. Artificially capping the fees will disproportionately harm credit unions as they do not have the economies of scale of larger commercial banks and will thus find it more difficult to internalize the loss.
Related Files
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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