Mar 29, 2006

Credit card interchange fees cut 25%, debit card fees 70%

Bloomberg reported last week that major international banks, including Citigroup Inc. and Spain's BBVA, have agreed to lower fees on credit and debit cards, under pressure from Mexico's Central Bank. The average interchange fee was cut by 25% for credit cards and by 70% for debit cards, resulting in annual revenue losses of US$200 million. Mexico's Central Bank expects that the cuts will encourage card usage, especially debit card useage.

The fee cuts are also part of a larger set of initiatives intended to foster competition. At a conference last year, Central Bank Governor Guillermo Ortiz said that two banks account for almost 70 percent of transactions on the acquiring side. "We have to bring in more players," he said. "There are no nonbank participants in the switches. This situation simply cannot go on."

Regulators, merchants and cardholders all see payment as a basic commodity that needs to be as cheap as possible. Commoditization is already cutting interchange revenues by $200 million in Mexico, and will end up destroying much more than that. In comparison, Mexican banks lost $85 million due to fraud in 2003. Commoditization is always a much bigger problem than fraud. The banks that Welcome works with all see EMV chip card technology as a way to reinvent the payment experience and fight commoditization, not just fraud.

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