The New York Times has once again allocated a fair amount of newspaper real estate to the topic of credit card fees. The main subject, of course, is the recently agreed, but not yet approved, settlement worth an estimated $7.25 billion that Visa and MasterCard would pay to the merchants suing them, in exchange for retaining the freedom to set credit card interchange rates on their own. My initial reaction was that the settlement was not nearly as big a victory for the merchants as their lawyers claimed and, surely enough, once the retailers realized what had actually been agreed on (it took them a good week to do so), they promptly voiced their opposition. And the NYT has been happy to provide them with a megaphone.
So there are two separate articles that I’d like to focus on. They are both replete with statements from lawyers, trade group representatives and experts and, as you might expect, are plentifully supplied with merchant accounts of the reality on the ground. The unmistakable impression one gets from reading these two articles is one of a world in which the credit card networks are doing their best to run retail businesses into the ground and that, if only these interchange fees were scrapped lowered, it would all be good once again. Well, that is not the world I live in.
Surcharging Credit Card Transactions
So the only major concession the merchants’ lawyers managed to negotiate for their clients was the right to place surcharges on credit card payments. But there are two issues with that. To begin with, as we already noted, doing so would risk alienating loyal customers. And the merchants fully realize that. Here is one quoted in the NYT:
When somebody’s in my store, I want them to be impressed by both the quality of my products and the service they receive… And if I suddenly have to get into a conversation where I’m penalizing them if they use a credit card, it doesn’t make for very good customer service.
However, even if a retailer wanted to place a surcharge on credit card transactions, she may not be allowed to do so, because, as the NYT notes, such surcharges are banned in ten states that constitute 40 percent of the U.S. population. And then there is the American Express issue. AmEx is not a party to the settlement and prohibits its merchants from imposing “any restrictions, conditions, disadvantages or fees” when accepting its cards that “are not imposed equally on all Other Payment Products.” Combined with Visa and MasterCard rules prohibiting surcharges on debit cards, the AmEx rule effectively prevents merchants from imposing any surcharges in the remaining 40 states.
But is that really an issue? Are interchange fees really a road block to the merchants success? I think not.
What’s the Issue?
So why do the merchants want the interchange fees to be lowered? Here is the fairly representative rationale given by a candy maker, as quoted by the NYT:
Interchange fees make up the vast majority of the costs of accepting a credit card, and I have no idea how Visa and MasterCard set them.
[In Europe] the amount of commerce they do is similar, and demographically and financially it’s similar, and yet their fees are one-eighth of ours, and that makes you wonder what accounts for the difference. And as far as I can tell, the only difference is that the fees are regulated. [Yet card companies] still manage to make a profit over there, too.
So interchange rates are too high, especially when compared to Europe. But how high are they, really? For the vast majority of this merchant’s transactions, credit card interchange rates would be somewhere between 1.5 percent and 2 percent, plus ten cents per transaction. How do we know that this is too high? I don’t know, but I would have expected that, if debit interchange rates were too high, as merchants also claimed, once they were lowered, we would have seen a fall in retail prices, as we were promised. It didn’t happen.
But what I find most disturbing in the above statement, which again is fairly representative, is the comment that, even though in Europe interchange fees are lower, the card companies still manage to make profit. But why restrict this rationale to the credit card processing industry. In my opinion, selling, say, cupcakes for $4 apiece is outrageous and even if you got rid of the 1.5-percent interchange fee altogether (a grand total of six cents), the price would still be exorbitantly high. I’m sure that cutting the price in half would still allow the producer to make a decent profit. And yet, I’m not hearing anyone pushing for an across-the-board reduction of cupcake prices. So what gives this merchant the right to tell others what profit they should make?
The point is that the interchange dispute is one that should be left to the interested parties to settle between themselves. And if a merchant really believes that interchange fees are too high, she is free to elect not to accept cards. Moreover, a lowering of the credit card interchange rates could hurt merchants more than it would benefit them, as it could make it less attractive for issuers to maintain credit card programs and especially rewards programs. And if credit card use fell, the shortfall could not possibly be made up for by an increase elsewhere, not even close. And if that happened, the retailers would stand to lose as much as anyone else.
Image credit: Seigneur-five.blogspot.com.