Exchanging Other Fees For Interchange

With consumer credit card reform having taken place last spring, businesses want their share of Congress' concern. Their cries are getting louder for action to be taken to limit interchange fees -- the cost imposed on businesses for credit card transactions. The Wall Street Journal has an article on interchange fees today. I can understand why businesses don't want to pay as much, as it's a huge expense. But the only alternative is for the cost to fall on consumers.

From WSJ:

U.S. banks raked in $45.3 billion last year from credit- and debit-card fees charged to merchants. About 75% of that comes from interchange fees set by Visa Inc. and MasterCard Inc.

Overall merchant fees, including other revenue collected by banks and processing middlemen, are up 78% from $25.5 billion in 2003, according to the Nilson Report, a Carpinteria, Calif., newsletter that tracks the payments industry.

Here's what that looks like, in chart form, via WSJ:

Interchange Fees WSJ.gif

As you can see, while the quantity of fees is increasing, that's due in large part to people just using credit cards more. Obviously, this trend will only continue, as more and more people are discovering the delightful convenience of credit cards. Meanwhile, the actual percentage of transaction required to be paid as interchange has decreased to the lowest levels we've seen all decade. To me, that makes it seem like the problem of higher costs isn't the fees as much as the popularity of credit cards. After all, the fee percentages are decreasing.

So what if Washington heeds the call of business and orders banks to charge them less? I think you'd have a similar kind of situation to what I noted regarding overdraft fees a few weeks back. Clearly, banks won't simply be content with making less profit. Instead, someone else will pay. Consumers will be forced to pick up the slack.

This could happen in a few ways. Rewards programs could suffer, as higher annual fees or lower rewards to spending ratios could be imposed. That might make up some of the slack for banks. Alternatively, more fees and/or higher interest could result. In fact, I think if interchange fees were forced lower, then annual fees for all credit cards could become more much more common. Currently, businesses pay for the convenience of credit cards, but if they didn't consumers would have to.

So who should bear the cost? I think it makes sense for businesses to pay. After all, they're the ones ultimately profiting from the ease of credit cards. Consumers get the convenience too, but they're paying as well -- indirectly. Interchange fee costs inflate the prices of the goods and services that companies who accept credit cards charge.

As a result, the debate seems like kind of a silly one to me. Ultimately, consumers really pay. Prices could be made lower if interchange wasn't so high, though I'd predict retailers would mostly pocket the difference. Even if they didn't consumers would just pay more directly. I think businesses are probably under the same delusion as Congress was during their credit card regulation earlier in the year: they think that banks will just make less money. That's fantasy. If their wish is granted, businesses will just have customers with less money to spend in proportion to the higher credit card fees that they're now paying instead.