3 Myths About Credit Card Fees for Businesses
Aneace Haddad was interviewed for an article by Matthew Bandyk that was published in US News & World Report. He was asked several questions on interchange. Here is a snippet from his blog:
Q: What about the argument that limiting interchange fees will lead to credit card companies offering fewer rewards and benefits? What about the business side? Are they only benefits for merchants if Congress were to limit interchange fees? Any potential drawbacks? I've read a little about the example of Australia. What kind of regulations did they enact there, and what were the effects? I've also read a little on your blog about how interchange fees affect different kinds of businesses differently--can you give an example?
A: Credit card companies finance their points, miles and other rewards primarily out of interchange fees. Everybody knows that gold and platinum credit cards give more rewards, but very few people know that these cards generate higher interchange fees for merchants to pay. The rewards are financed directly out of those interchange fees. Cutting interchange fees will cause banks to give less rewards, or to find other ways to finance those rewards.
In other countries, whenever interchange fees were cut, there was little evidence that merchants passed the savings on to their customers. The benefits of lower interchange benefit merchants directly, immediately, by lowering their cost of doing business. Theoretically, the lower costs will eventually find their way into the prices that shoppers pay, but that could take a long time. Look at how fast gas pump prices go up when oil is expensive, and how long it takes for prices to come back down after oil goes back down.
In Australia, there were essentially two decisions made to help limit interchange fees. First, the fees were forced to be cut by around half. Second, merchants were given the right to surcharge for the use of credit cards. The result was that credit card companies cut their rewards programs and many merchants began surcharging.
Interchange does not react to competitive forces in the same was as other types of fees. Interchange fees are set by Visa, MasterCard and other card schemes as a feature of each card product that the scheme offers to banks. When a bank is deciding between a Visa or MasterCard logo on their cards, and between one company's platinum card and the other's, it is very tempting to choose the one that provides the highest interchange fees. This competition is what has driven interchange fees higher over the years. Merchants are not part of that negotiation process of course, yet they are the ones that pay the fees. This is where the animosity comes from....
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