December 20, 2007
EU Takes on Interchange Fees
Retailers in Europe and beyond are applauding the European Commission’s (EU) ruling against Mastercard, which gives the credit card company six months to come up with a new system to apply interchange fees on cross-border purchases or face daily fines up to 3.5 percent of sales.
The ruling is seen as a victory for retailers who have argued that the cost paid by businesses for interchange fees results in higher prices for consumers.
Sir Terry Leahy, Tesco’s chief executive, told The Guardian, “Tesco pays about £100m in fees to the banks for processing credit and debit cards – that’s £100m we haven’t been able to invest in price, range or service for our customers.” he said.
Neelie Kroes, competition commissioner for the EU, told the paper, “Consumers foot the bill, as they risk paying twice for payment cards: once through annual fees to their bank and a second time through inflated retail prices paid not only by card users but also by customers paying cash.”
Not everyone, however, agrees with the ruling, arguing instead that capping or making other changes to limit interchange fees ultimately results in higher fees consumers must pay to obtain cards.
Mastercard plans to appeal the EU’s decision.
Discussion Questions: What is your take on interchange fees? Are they excessive as most retailers and their industry groups charge? Is governmental action necessary to address this situation or should it be left to market forces to settle it?
[Author’s note] Here are a couple of quotes from Tim Hammonds, president and CEO of the Food Marketing Institute, from a Dec. 4 press release.
“This (Universal Default interest rate increases) is but one example of the hidden, egregious ways that Visa and MasterCard bilk consumers and businesses out of billions of dollars each year. The most costly scheme by far is the interchange fee that card companies extract from each and every plastic transaction.”
“FMI joins all retailers in urging Congress to continue scrutinizing interchange fee abuses and all excessive and unwarranted credit card rates and charges. Once we shine the light of disclosure on these practices, we can pursue solutions for consumers and retailers.”
BrainTrust
Recent Discussions
Discussion Questions
Poll
There are no “market forces” when it comes to the credit card industry. No wonder so many retailers promote their private cards.
A substantial portion of the interchange goes back to the issuing bank. Issuing banks factor these into their cash-flows while evaluating credit risk from extending or increasing credit for cardholders. In the absence of this compensation, issuing banks will most probably get more restricted in extending or increasing credit since now they will have to bear the entire credit risk of the transaction until the payment comes through from the cardholder.
On the other hand, banks could pass these costs on to the cardholder in the form of increased rates and fees or lesser rewards. To quote James M. Lyon, First Vice President, Minneapolis Federal Reserve Bank, “In some of these countries, card associations have responded to declining interchange fees by generating revenue through other means that regulators may not have foreseen or desired. In Australia and Spain, for instance, where interchange fees have declined due to regulatory pressure, annual cardholder fees have increased; in Australia, interest-free periods have shortened and rewards programs have become less generous. On the other hand, in the United Kingdom, while interchange fees have fallen, both annual fees and introductory rates remain relatively low.”
If issuers pass these costs on to cardholders, consumers will probably be less motivated to spend, since credit card transactions represent a very significant portion of consumer spending, which may have an adverse effect on the economy, which is very much dependent on consumer spending.
Interchange needs to be regulated, not probably by putting on an arbitrary cap, but rather by coming up with a better measure of the true cost of the factors that interchange claims to be compensation for. In the words of James Lyon, “Merchants are seeking relief from rising credit card fees, but the economics are complex and near-term resolution seems unlikely.” (Please click here for the original Minneapolis Fed article: The Interchange Fee Debate:
Issues and Economics)
Mastercard went public in mid-2006 for around $45. The stock price today is $212. That’s because it’s a shared oligopoly with American Express, Visa, and Discover. The Big Four are well aware of each other’s price increases and encourage them. This isn’t a competitive market, it’s a lucrative membership club.
Why is it retailers can’t pass on the cost (or partial cost) of processing a credit card transaction to a customer? Our local government will charge an additional fee if their customer uses a credit card as payment but retailers are restricted….
I’m with MasterCard on this one to a certain extent. When businesses (like MC) are starting out, everyone desires their services and agrees to their fees. Later, when the businesses become successful, we begin to regret the deal we made in good faith and take steps to change it in our favor. It’s the small-minded, dishonest way in which society operates, so we mustn’t be surprised. I’m sure the American oil industry wasn’t, nor was Microsoft.
Abuses are a different matter altogether, of course. Case histories abound regarding successful businesses that try to be just a tiny bit more successful by exploring every boundary and pushing every envelope. And that, too, is part of the way in which society operates.
If costs are associated with interchange fees, then it’s fair to charge for them along with a reasonable profit. So what else is new? Also not new is making political hay by going after “the big guys” with hyperbolic, headline-grabbing, and often specious charges. We’ve seen it time after time: the initial charges are front-page news and years later are dropped and reported on page ten. By then, the politicians who started the flap are off to new pastures and only the legal community has profited.
Looked at another way, do we really want banks to make less money in every legal way they can? Do we want them to have less money to lend to us at Federally-mandated rates?
More Discussions
Has Same-Day Delivery Become an Expectation Across Retail?
Are expectations around retail delivery speed in flux?OpenAI Names the Infrastructure Standard for Agentic Commerce
Will OpenAI or Google (or another entity) set the gold standard for agentic commerce?Is Five Below Poised For Even Greater Growth?
Five Below is hitting serious growth numbers. Can this trend continue?
There are no “market forces” when it comes to the credit card industry. No wonder so many retailers promote their private cards.
A substantial portion of the interchange goes back to the issuing bank. Issuing banks factor these into their cash-flows while evaluating credit risk from extending or increasing credit for cardholders. In the absence of this compensation, issuing banks will most probably get more restricted in extending or increasing credit since now they will have to bear the entire credit risk of the transaction until the payment comes through from the cardholder.
On the other hand, banks could pass these costs on to the cardholder in the form of increased rates and fees or lesser rewards. To quote James M. Lyon, First Vice President, Minneapolis Federal Reserve Bank, “In some of these countries, card associations have responded to declining interchange fees by generating revenue through other means that regulators may not have foreseen or desired. In Australia and Spain, for instance, where interchange fees have declined due to regulatory pressure, annual cardholder fees have increased; in Australia, interest-free periods have shortened and rewards programs have become less generous. On the other hand, in the United Kingdom, while interchange fees have fallen, both annual fees and introductory rates remain relatively low.”
If issuers pass these costs on to cardholders, consumers will probably be less motivated to spend, since credit card transactions represent a very significant portion of consumer spending, which may have an adverse effect on the economy, which is very much dependent on consumer spending.
Interchange needs to be regulated, not probably by putting on an arbitrary cap, but rather by coming up with a better measure of the true cost of the factors that interchange claims to be compensation for. In the words of James Lyon, “Merchants are seeking relief from rising credit card fees, but the economics are complex and near-term resolution seems unlikely.” (Please click here for the original Minneapolis Fed article: The Interchange Fee Debate:
Issues and Economics)
Mastercard went public in mid-2006 for around $45. The stock price today is $212. That’s because it’s a shared oligopoly with American Express, Visa, and Discover. The Big Four are well aware of each other’s price increases and encourage them. This isn’t a competitive market, it’s a lucrative membership club.
Why is it retailers can’t pass on the cost (or partial cost) of processing a credit card transaction to a customer? Our local government will charge an additional fee if their customer uses a credit card as payment but retailers are restricted….
I’m with MasterCard on this one to a certain extent. When businesses (like MC) are starting out, everyone desires their services and agrees to their fees. Later, when the businesses become successful, we begin to regret the deal we made in good faith and take steps to change it in our favor. It’s the small-minded, dishonest way in which society operates, so we mustn’t be surprised. I’m sure the American oil industry wasn’t, nor was Microsoft.
Abuses are a different matter altogether, of course. Case histories abound regarding successful businesses that try to be just a tiny bit more successful by exploring every boundary and pushing every envelope. And that, too, is part of the way in which society operates.
If costs are associated with interchange fees, then it’s fair to charge for them along with a reasonable profit. So what else is new? Also not new is making political hay by going after “the big guys” with hyperbolic, headline-grabbing, and often specious charges. We’ve seen it time after time: the initial charges are front-page news and years later are dropped and reported on page ten. By then, the politicians who started the flap are off to new pastures and only the legal community has profited.
Looked at another way, do we really want banks to make less money in every legal way they can? Do we want them to have less money to lend to us at Federally-mandated rates?