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No changes to interchange!

Interchange and Merchant Fee Card Issues: Why the OBA opposes changes proposed by retail merchants and their trade associations

Over the past several years retail merchants have gathered to force reductions in their costs of operation by challenging the fees charged by financial institutions that allow their customers to pay for goods and services with credit and debit cards. In addition to the increase in business that has resulted from this addition, merchants have virtually eliminated the risk of fraud and non-payment by transferring those risks to the bank with which the merchant does business.

The term “interchange” is used to describe the fee that banks charge their merchant customers, but it's a much broader term. Overall it encompasses a series of charges for services provided both to consumers and merchants and, in addition to transferring the risk of fraud and non-payment also covers maintaining the networks needed for speedy credit and debit card authorizations.

What many merchants overlook in making their case to policy-makers is that these services didn't just fall off of a truck and land at the merchant's stop with substantial costs having been incurred by the financial services system. Establishing and maintaining this global network – a network that allows a customer from Edmond to purchase goods in Beijing, China, and have that purchase transaction completed in a matter of seconds – cost a great deal of money each year.

What do merchants get for the fees they pay? For one thing, they receive guaranteed payment. They don't have to worry about counterfeit cash, bounced checks or any other form of consumer fraud, a cancer that's been growing on the American economy for a number of years. Those worries are transferred to the issuing bank because of interchange and the merchant fees. And they don't have to build their own, proprietary system to accommodate their customer base – the banks have already done that for them.

On that point, it's important to point out that merchants don't even bear the costs of establishing and developing their own customer base relationship and putting cards into circulation. History has shown that merchants with their own card programs and systems are limited in their reach because the cost of maintaining such a proprietary system is just too high.

Price controls on interchange ignore the number of benefits the merchants receive when they decide to accept credit and debit cards. They could choose not to accept such cards, and just accept cash or checks. But the truth is both merchants and their customers benefit significantly from the use of credit and debit cards and the electronic payments system as a whole.

Electronic payments are safer and faster than handling cash. Electronic payments eliminate the risk of bounced checks. Customers need to rely less on carrying cash. Settlement for the merchant is immediate. Fewer employees are needed to run the merchant's operation, thus helping the merchant reduce overhead costs. And every merchant's customers are able to respond more quickly to incentives to do business when using credit or debit cards.

Interchange is simply a cost of doing business for the retail merchant. It isn't any different than rent, insurance, utilities, wages, or benefits. Interchange enables the merchant to conduct his or her business quickly, efficiently, and without incurring the risk of fraud or non-payment by the customer.

Australia is the only example we have where retailers were successful in persuading policy makers to cap interchange and merchant fees. The result: higher profits for retailers, not lower prices for consumers as had been promised. In fact, it shifted the cost of fraud and non-payment to consumers through higher costs for credit.

Oklahoma bankers work hard to serve their customers and their communities. One way they do that is by arranging for their retail customers to have access to the global payment system. The small fees that are charged as a result – to shift the risk of fraud, non-payment, and improve efficiencies in operation – are small when compared to the results gained by the merchants. They always have a choice: they can simply choose not to accept the cards in the first place and rely solely on cash and checks.

Any effort to shift or cap interchange and merchant fees simply shifts that cost from the retail merchant to the consumer. That's a bad idea no matter how you slice it.

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