Feb 5, 2006

Protecting interchange fees: what alternatives to litigation?

Retailers don’t see nearly enough value in payment cards to justify their cost. To drive fees down, they are accusing bankers of illegally fixing card fees and are suing the card associations and the major banks. This could cost the global cards industry over $100 billion, experts say, and lead to a bank-card system that would be more expensive and bureaucratic to manage.

The Guardian reported yesterday that a new investigation has been launched in the UK on the legality of interchange fees. The Office of Fair Trading (OFT) estimates that banks overcharge retailers through interchange fees which are essentially a tax. MasterCard argued that the fees allow banks to recover part of the losses due to the interest-free credit period offered by many cards, but the OFT ruled that this has nothing to do with the payment services provided to retailers.

In the US, the National Association of Convenience Stores (NACS) says that the total cost of card fees may soon exceed store profits. Card fees are the fourth-largest expense at the store level and are projected to exceed store utility costs within the next decade and the cost of store rent by 2020. The retailer association compares credit and debit card payment to basic commodities like electricity, water and rent, as opposed to more valuable expenditures which help retailers grow their businesses.

Another major retailer association, the Food Marketing Institute, alleges that credit card companies and their member banks set interchange fees with no regard for merchants and with no additional service provided to merchants, in spite of the fact that fees have increased steadily over the past 10 years. Although merchants are paying more year after year, they don’t feel that they are getting anything in return. No wonder payment fees feel like a tax.

Protecting interchange fees through court battles is one way to address the problem. Another way is to re-invent the payment card product into something which offers far more benefits to retailers, and which retailers would be happy to pay for. The problem has become too big for little incremental benefits to do any good. Payment card products need to provide substantial new value that gets merchants to say, “Wow! This really helps me solve the types of problems that keep me awake at night! When can I have it? I want it now!”

Sources:
Price fixing litigation could cost the global cards industry over $100 billion
Consumer watchdog to look into Mastercard's 'anti-competitive' fees
FMI Asks Supreme Court Not to Give Credit Card Firms Shelter
Continued engagement by our industry will benefit us all
Interchange Fee Battle: Time to Step Back? Is it time to take the fight over interchange fees out of the courts before it does real harm to the credit card associations and their member banks?

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