A recent Forbes article attempted to refute many of the conclusions of a prior Wall Street Journal article that had illustrated how the card schemes (Visa Inc. and Mastercard Inc.) have dramatically increased their fees in recent years. In response, the Forbes article challenged the Journal article by completely changing the subject to interchange fees instead of scheme fees.
That response relied upon faulty logic and misleading statements to conclude that interchange fees have not increased. In fact, we estimate that interchange fees, as with scheme fees, have increased dramatically. While our analysis has focused on the period following passage of the Durbin Amendment, we note that some of the most egregious increases occurred just prior to Durbin by virtue of Visa’s introduction of its “Signature” products as well as issuers’ efforts to convert small businesses from using “consumer” cards to “business” cards.
Frankly, we welcome the opportunity to clarify how interchange fees have risen dramatically over the recent past. We also suggest the real truth of the matter can only be ascertained by a thorough examination of the total cost of acceptance of credit and debit cards. We see little need to defend our position that scheme fees have also risen, since the author of the Forbes response failed to challenge our analysis of scheme fees.
The schemes have become the darlings of Wall Street. With average operating margins of 58% and earnings per share of $5.04, their gusto to create new fees du jour seems unquenchable. In fact, a thorough analysis of the total costs will illustrate that not only have schemes increased both the interchange paid to the banks as well as their own fees, they have also gradually transferred costs from the banks to the merchants in a number of other ways.
These include the fraud-liability shift associated with EMV as well as other efforts to foist fraud costs and costs to prevent fraud on unsuspecting merchants. While less apparent than fee increases, these subtle and gradual changes have added significantly to merchants’ cost of acceptance while lining the pockets of both the banks and the global schemes.
Finally, all of this has been done despite technological advances that would typically translate into more efficient operations and lower costs to providers and end users. This pattern is commonplace in industries outside of payments. The schemes, unfortunately, are shielded by a lack of real competition in the card industry.
These new fees do not appear to do much if anything to improve the services provided to consumers or to merchants. In spite of the schemes’ claims of innovation, the card business, like all businesses operated by banks or on behalf of banks, relies more on preserving the status quo, holding competition at bay, and confusing merchants, policymakers, and regulators than on real innovation.
With respect to the Forbes article, we hasten to point out that one cannot arrive at a meaningful conclusion that interchange fees have not risen by simply computing an average of the schemes’ “published” rates. This was a tactic employed by bank strategists during the debate over the Durbin Amendment and one that needs to be finally put to rest.
The schemes rarely retire old rates. Instead they retain them so long that few experts recall what their acronyms even stood for when they were originally created. Who today knows what “MOTO” or “EIRF” means? In our view, retention of these worn-out rates adds greatly to the lack of transparency that is one of the hallmarks of the card business. It also helps people make misleading statements that confuse casual readers or Hill staffers.
The correct way to measure changes in interchange rates is to use a weighted average of the actual fees charged to merchants rather than a simple average of the published rates. There is no doubt that issuers have gradually reissued cards by moving their customers from standard card products to reward card products and from consumer cards to business cards whenever possible. The weighted-average approach clearly illustrates that the interchange rates actually charged to merchants have increased.
Another statement made in defense of increasing fees is that all scheme fees are in fact charged to the banks that are members of the schemes rather than to merchants. While technically correct, this is grossly misleading since, in the United States, merchants are required to process transactions through banks to accept scheme card products. The fact is, the banks add their own fees to the schemes’ fees and profit on the back side of every transaction, so the merchants lose again.
—Mark Horwedel is a strategic consultant to CMS Payments Intelligence Ltd., a consultancy based in Manchester, United Kingdom, and Atlanta.