By Kevin Woodward
The debate over the price merchants pay to accept credit cards may be about to intensify. A new report suggests that capping credit card interchange at 22 cents plus 30.5 basis points per transaction could cut $15 billion from the current total of $33 billion U.S. merchants pay in credit card interchange today. The report comes from CMS Payments Intelligence Inc., a United Kingdom-based consultancy.
While debit interchange has been regulated since the 2010 passage of the Dodd-Frank Act and its accompanying Durbin Amendment, the payments industry has yet to contend with a serious effort to curb credit interchange outside of the court system. Indeed, a major settlement involving credit card interchange was overturned earlier this summer by a federal appeals court, throwing the issue back to the lower court in Brooklyn, N.Y.
The agenda for a review of the U.S. credit card interchange system has been set with the establishment of caps in Europe in December 2015 and in Australia beginning in 2003, Callum Godwin, CMS research manager, tells Digital Transactions News. “Europe is a developed economy just as the U.S. is,” Godwin says. “That begs the question, ‘If Europe can do it, why not the United States?’”
CMS arrived at its $15 billion figure by using the framework of the Durbin Amendment, which caps debit interchange at 22 cents plus 0.05% per transaction. CMS says that law has eliminated $8 billion in debit interchange fees. The debit-interchange cap applies only to financial institutions with $10 billion or more in assets, a stipulation CMS carried over for its proposed credit-interchange cap.
“We looked at the business models for credit card issuers and said there are a number of costs that are not transactional,” Godwin says. In its report, CMS cites as an example Capital One Financial Corp. and calculates the company’s interchange income would decrease 73%, or $3.92 billion, to $1.48 billion from $5.4 billion, using 2015 figures.
If Capital One eliminates credit card rewards programs, as many European issuers have done, Godwin says, that $3.92 billion shortfall would shrink to $752.6 million, or 10% of the company’s operating profit. This estimate assumes 59% of Capital One’s credit card interchange income is used to fund its rewards programs, according to the CMS report. “We don’t think this will derail major banks,” he says. “The impact on their profitability and financial health will be minimal.”
Acknowledging that he is not a politician, Godwin says U.S. Sen. Richard J. Durbin, D.-Ill., “is very in favor of fair interchange.”
But Eric Grover, principal of Minden, Nev.-based payments consultancy Intrepid Ventures, critiques the CMS report as lacking objectivity, saying it “reads like a [National Retail Federation] brief or what I would expect we’ll see coming out of Quinn Emmanuel, the law firm which is filing a consumer class-action interchange suit against MasterCard in the U.K.”
The NRF has long led the merchant charge against what it views as excessively high payment card acceptance costs. While one merchant-backed concept is that lower interchange rates could benefit consumers, Godwin says with so many elements going into the price of merchandise, “It’s impossible to tell one way or another.”