European regulators are expected tomorrow to force MasterCard to cut interchange fees, according to Bloomberg and others. Those are the rough and bold headlines, but the devil’s in the details - everyone will be watching to see what the ruling actually says. The Bloomberg article jumped out at me among all the others today because it goes into a little more detail on what merchants are saying. There’s a little piece of information hidden near the bottom of the article which I think holds the real key to addressing interchange regulations.
“Ikea estimates that the fees cost the company 80 million euros a year. In the U.K., the retailer applies a surcharge for payment by credit cards to reflect the higher costs for these transactions. Customers have responded by using debit cards.”
That's the real answer!
Merchants already have a very viable solution in some countries, like the UK. Let them apply surcharges on card brands that are too expensive in relation to their value, in order to encourage customers to use cheaper payment methods. The card brands will respond either by reducing their fees on their own, or by adding value to their card products so that merchants want to accept them even if the fees are higher.
The only regulation needed is to allow merchants the ability to easily apply surcharges. There is no need for artificially setting interchange fees in a regulated manner like what was done in Australia.