Don’t Expect a ‘Here Lies Interchange’ Epitaph Any Time Soon

With potential regulation of credit card interchange looming and with the unwavering demand from merchants for lower card-acceptance costs, the possibility that interchange as it’s known today may dramatically change can’t be entirely dismissed—but don’t count on its demise. That was the conclusion at the Money 20/20 trade show this week in Las Vegas, where a panel discussion, provocatively labeled the “Death of Interchange,” took on interchange’s future.

Merchants pay interchange fees—typically a percentage of each transaction—to the bank that accepts and processes their card payments. For credit cards, the rate usually falls into the 2%-to-4% range on each sale.

“The number-one thing is, merchants hate interchange fees,” Carolina Nucamendi, cofounder and chief executive at Waivr, a pay-by-bank provider, told attendees. “For a long time, they thought of it as a cost of doing business, but more recently have started questioning it.” Los Angeles-based Waivr specializes in account-to-account payments services with a focus on subscription payments.

Couple that sentiment with the burgeoning growth in real-time payments and open banking, which makes account-to-account connections easier, and a threat to the longstanding economics of credit and debit card payments may seem a possibility. U.S. credit card interchange also could be regulated if the Credit Card Competition Act progresses through Congress and ends up being passed into law. That bill proposes to put a lid on interchange by requiring more transaction-routing choices for merchants.

But as panelist Steve Ledford, principal at Steve Ledford LLC and a former executive at The Clearing House Payments Co. LLC, pointed out, interchange has been regulated in other markets, and yet, “cards continued to be issued in [those] places.”

One outcome, even if the CCCA is not enacted, is that merchants may naturally gravitate to payment methods that carry costs lower than interchange. That’s why Nucamendi is focusing on account-to-account payments with Waivr.

“We have done account-to-account payments for a long time,” she said. “What we’re seeing now, [and] I think it’s important, is open banking is bringing in the [non-card] experience for the customer.” If consumer and merchant activity for a card-eschewing payment method develops, it could have an impact on card volume, she said. “For me, for account-to-account payments to work well, it has to be paired with open banking.”

As for the card brands, Mastercard Inc. and Visa Inc. are actively involved in open-banking services, which might power pay-by-bank options. Pay-by-bank, which relies on account-to-account payments but does not rely on a debit card as a proxy, got a lift last week when J.P. Morgan Payments launched a pay-by-bank service that uses open-banking technology from Mastercard Inc. that the card brand announced in January. Both card brands have made open-banking acquisitions in recent years.

But, as riled up as merchants may be about interchange, at least one merchant executive sees no reason to halt card acceptance. Even if the CCCA goes through and the Federal Reserve lowers its 21-cent debit-interchange cap (an action the regulator could take Wednesday as it revisits its 12-year-old debit card regulation), some merchants will continue accepting cards.

“We will never stop accepting debit,” Mike Farrell, head of global payments at Milford, Conn.-based Subway, said in a separate panel titled “Pay by Bank: A Viable Challenger to the Card Duopoly?” “We want to meet our customers wherever they want to be met. If you’re comfortable using debit … then we will happily let you use your debit or credit card as well.”