Interchange…Again

Each time a merchant takes a card transaction, he pays a fee to his processor. This is a percentage of the sale called a discount rate, and in the case of MasterCard and Visa transactions it’s based on a sort of wholesale rate, called the interchange rate. That rate is set by the networks, and the fee goes into the coffers of the card issuers.

We rehearse this little lesson in card economics because the subject of interchange, which has been a bee in the bonnet of merchants for decades, simply won’t go away. In recent years, it has triggered lawsuits—including a massive antitrust case—and led to a bitter war of words between merchant lobbyists and those for the banks.

With respect to debit cards alone, the interchange war inspired the Durbin Amendment, part of the 2010 Dodd Frank Act (see Endpoint, May 2016). That amendment, which put a cap on debit card interchange for banks with $10 billion or more in assets, is now undergoing a review under a 20-year-old federal law known as the Economic Growth and Regulatory Paperwork Reduction Act. That review has stoked combat in the debit-interchange theater of the war.

Will the war, with its heavy toll in costs and mutual rancor, ever cease? We don’t pretend to know the answer, but we do suggest that it might be time for the banks to make a small and timely concession. Timely because, with the EMV chip card conversion going on, merchants are finding themselves saddled with chargebacks they’ve never seen before. That’s because the rules for the conversion call for liability for certain chargebacks to shift from issuers to merchants if the merchants can’t handle EMV.

But, though many merchants have the equipment in place, they can’t switch on EMV acceptance because of factors like certification logjams. That issue, too, has led to a federal lawsuit (Acquiring, May 2016).

So, what about a carrot to go with the stick? Why not at least a modest interchange break for EMV transactions, at least for a time. There’s precedence for this sort of thing, after all. Merchants that deploy 3-D Secure, a sort of EMV for e-commerce, can see 20 or so basis points shaved off interchange, we’re told.

Look, we’ve publicly disagreed with some of the merchants’ tactics in this war, particularly the concept of legally mandated caps on interchange. These are market distortions that end up benefiting no one but lobbyists and lawyers. But a voluntarily proffered discount to encourage a change as big as EMV would benefit consumers, issuers, and merchants alike. And, who knows, it might bind up some of the wounds of this long conflict.

—John Stewart, Editor, john@digitaltransactions.net