Merchants Urge That U.S. Follow Overseas Example on Interchange

Merchants turned up the heat on banks and the bank card networks on Thursday by releasing a report showing that interchange fees in the U.S are much higher than in other countries, and arguing that policymakers in the U.S. should regulate interchange as have their counterparts overseas. “We want to make sure the public and polcymakers understand what is going on around the rest of the world,” said Mallory Duncan, senior vice president of the National Retail Federation, a Washington, D.C.-based trade group that has led the charge against interchange, or “swipe fees,” as merchant groups have started calling the fees merchant acquirers pay issuers on each card transaction. Duncan spoke during a press conference held by the Merchants Payments Coalition to release its 14-page report, entitled, “'Swipe Fee' Reform–International Lessons.” The MPC, also based in Washington, was formed by retail trade groups in 2005 to lobby in favor of interchange regulation. In the report, the MPC shows the U.S. with the highest interchange among 15 countries or regions compared, at 2%. New Zealand, Australia, and the European Union, all of which have acted to regulate interchange in one way or another, are shown at 0.95%, 0.50%, and 0.30%, respectively. Arguing that interchange fees are ultimately borne by consumers and thus drain the economy, the MPC says that consumers in the U.S. would have saved $125 billion over the past four years had the same regulation been imposed here as was imposed in Australia. In 2003, the Reserve Bank of Australia capped interchange at an average of 0.55%, about half what it had been. “The result is consumers [in Australia] have saved money in the billions of dollars, there's more competition, consumers pay lower fees for credit cards, and the economy has benefited, all while credit card transactions have gone up,” said Douglas Kantor, counsel to the MPC, during the press conference. The argument that current interchange rates harm the economy comes at a time when legislators may be especially willing to listen, with the economy still struggling to recover from its deepest recession since the 1970s. Already, three pieces of legislation have been introduced, two in the House of Representatives and one in the Senate, that would rein in interchange either through beefing up merchants' bargaining power with the banks and the card networks or by allowing merchants to surcharge for them. But a spokesperson for the Electronic Payments Coalition, a D.C.-based group formed by banks and the card networks to lobby against interchange regulation, charges that the MPC's report is misleading. “The premise of the study is fundamentally flawed,” she tells Digital Transactions News. The rates shown in the report for various countries and regions represent interchange only, she says, not the total rate, or discount rate, that merchants pay on each transaction. In the U.S., interchange accounts for 80% to 85% of the discount rate, which also includes fees to acquirers and processors, but a much lower percentage overseas, where acquirers assume more risk responsibility, she says, and hence collect a higher proportion of the overall rate. Looking at discount rates rather than interchange alone, the U.S. is in the middle of the pack rather than at the top, she argues. “In reality, what merchants pay in Europe is about the same as in the U.S.,” she says. Indeed, the 0.30% rate shown for the EU is an interim rate imposed by the European Commission on MasterCard Inc. only, and only for cross-border transactions, which account for between 3% and 5% of all MasterCard transactions in the region, the EPC spokesperson estimates. As for Australia, while the interchange cap did slash rates dramatically, it's debatable whether consumers benefited and if so, by how much. The MPC report cites a 2005 study from the Payment Systems Board, part of the RBA, that indicates merchants were passing interchange savings on to customers. But a 2004 report from the Australian Competition Tribunal found no evidence that merchant savings were flowing to consumers. Some 83% of U.S. consumers believe merchants would pocket any savings from reduced interchange rather than pass them on, according to a Visa Inc. survey released on Thursday. Visa canvassed 1,000 consumers in July. After the RBA imposed the cap, banks in Australia hiked annual fees and cut back on rewards to help recoup lost interchange income. “This is what merchants want to do in the U.S.” says the EPC spokesperson. “They want consumers to pay.” The MPC's report can be found at: www.unfaircreditcardfees.com.