Within Five Years, Caps on Credit Card Interchange Are Likely, According to a DTN Poll

By Kevin Woodward

n

With debit card interchange rates already regulated, a majority of respondents to a Digital Transactions News poll consider caps on credit card interchange within five years as very likely.

n

In the poll, 58% of respondents said such legislation is very likely, along with 8% who said it was somewhat likely. Only 13% gave it an even chance. Of respondents, 13% said it was somewhat unlikely and 8% said it was not at all likely. Merchants have long contested interchange, claiming the price they pay to accept payment cards is too high.

n

Though no such legislation is under review at this time, the response suggests few would be surprised should it appear. Payment industry observers, however, do not consider such legislation likely.

n

No legislation on interchange regulation, whether for debit or credit, will move forward until the court case surrounding the so-called Durbin Amendment currently in the courts is resolved, says Mary Bennett, director of government and industry relations for the Washington, D.C.-based Electronic Transactions Association. In August, the Federal Reserve said it would appeal a July 31 decision overturning the board’s rule implementation of the Durbin Amendment, the section of 2010’s Dodd-Frank Act that regulates debit cards.

n

But Steve Mott Steve Mott, principal at Stamford, Conn.-based consultancy BetterBuyDesign, suggests that credit card interchange regulation may be moot within five years.

n

“Fundamentally, the cost of processing a credit card transaction to a merchant—the merchant discount fee, which is mostly interchange—is an artifact of a bygone era,” Mott says in an e-mail. Interchange relies on a card-based system where merchants manage risk, experience funding risk, and handle exceptions at the periphery of the physical networks, with one-size-fits-all pricing, Mott says.

n

Eventually uniform credit card interchange will get chipped away. “In fact, the big payment brands are already allowing issuers to cut their own, discounted interchange deals,” Mott says. “Given the political environment, this will take some years to materially drop down, but I believe in five years\' time, credit card interchange will be highly varied by product type/market vertical, and will be trending down to 50% of what it is today—on average, in aggregate.”

n

Instead of trying to regulate credit card interchange, payment industry participants should look at ways for merchants and banks to work together to more directly build their businesses.

“There's more money to be made by both banks and merchants in driving incremental purchases and business than ever existed in payment fees, which obviously was one-sided,” Mott says. “The point is, why fight over the level of credit card fees. They are going down anyway.”