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Interchange: facts, myths surrounding topic

 

Myths and Facts About Interchange
 
 
The following information was compiled for bankers across the country and made availble to us by the American Bankers Association. It explores the false statements that are being advanced by Senator Durbin and retail merchants in fighting against a delay of implementing the Federal Reserve's proposed requirements on setting prices for interchange.
 
 
Myth 1: Interchange is a hidden fee paid by consumers.
 
Facts: Interchange is a fee paid by retailers and businesses in exchange for access to a card payments system that is more efficient and cost effective than cash or checks. It is a transaction between two businesses and is a fair cost of doing business. This system allows retailers and businesses to sell their products faster, easier and more conveniently. It also makes sure the funds necessary to run the system – and fight fraud – remain available.
 
Myth 2: Businesses are required to accept cards for payment.
 
Facts: Retailers choose to accept cards for payment – they can always choose to accept only cash or checks. When they choose to accept cards they get higher sales, faster check-out, protection from fraud and counterfeiting, and they don't lose money when customers do not pay their bills. In return for these benefits, retailers pay a fee that averages between 1-2% of every purchase.
 
Retailers and businesses have the ability to discount for cash and checks and let consumers decide if they want to pay for the convenience of payment cards.
 
Myth 3: Retailers and businesses don't have to pay to accept cash or checks; payment cards should be no different.
 
Facts: Accepting cash or checks is not free. Retailers must pay for the handling, depositing, and processing of cash and checks. Checks have to be bundled and deposited at the bank, and retailers may pay a per check deposit fee. And checks may be returned as unpaid due to insufficient funds or because they are counterfeit, leaving the retailer to suffer the loss. Cash has to be counted and recounted and there is a cost to sorting, bundling, and transporting cash and protecting it from loss or theft (in armored cars, for example).
 
Cash and checks mean higher labor costs. Consider the self-service gas pumps that require no employee intervention and are able to remain open late at night, or the growing number of self check-out lanes at a variety of retail stores. The cost to operate these systems would be much greater if they only accepted cash or checks.
 
Myth 4: Small banks won't be affected by the Federal Reserve's interchange proposal.
 
Facts: The exemption for institutions with assets under $10 billion dollars from the interchange price controls is illusory and will not protect small banks. The marketplace will do what it always does – drive business to the lowest cost option. Retailers – especially big-box retailers – will have a powerful incentive to encourage customers to only use debit cards offered by large banks that are subject to the price caps. Smaller banks will have to lower their prices in order to remain competitive or their customers will move their checking accounts and relationships with their customers may be severed entirely.
 
It's basic economics: If a small retailer is selling candy bars for $1.00 each and a large retailer right next store is selling the same candy bars for only $0.12 because of government imposed price caps, shoppers will be driven to the lower cost option. In order to compete, the smaller retailer will have to lower the price of its candy bars or risk losing customers to the larger retailer.
 
It is also far from certain that a two-tiered pricing structure can even work. The technical challenges of implementing a system that has one price for small banks and another for large banks are daunting. Even if such a system can be implemented, this does not mean that the interchange fees for smaller institutions will remain as they were prior to the Durbin amendment, and most likely will not because of marketplace pressures.
 
The Durbin amendment extends beyond just price-fixing and applies to other parts of the card payment system. Provisions relating to how debit card transactions can be processed apply to any bank that issues debit cards – regardless of asset size. These provisions may result in significant compliance costs for every bank that issues debit cards.
 
Myth 5: Retailers and businesses don't get guaranteed payment from card transactions.
 
Facts: Retailers and businesses are guaranteed payment if they swipe the card and obtain authorization. They may lose the guarantee if they fail to obtain authorization or if they make an error in processing. But even in cases where there are insufficient funds in an account or the card is counterfeit, the retailer gets paid and the bank that issued the card suffers the loss. In other words, the bank pays for the fraud.
 
This is in contrast to checks, which may be returned to the retailer if the account is nonexistent or has been closed; if there are insufficient funds in the account; if the customer has stopped payment on the check; or if the check is counterfeit.
 
Myth 6: The Federal Reserve's interchange proposal means consumers will pay less.
 
Facts: There is nothing in the proposed rule that will require retailers to pass along savings to their customers. However, because the Federal Reserve has placed an artificial price cap on a business to business transaction, issuers will need to cover costs in other ways, including adding or increasing fees on checking accounts. We have already seen some banks recently eliminate free checking. Banks may also have to charge for debit cards and/or debit card transactions, or limit the dollar amount for which a debit card may be used. Some consumers may no longer be eligible for a debit card.
 
Myth 7: Retailers and businesses have no choice but to accept debit cards and have no power to bargain with payment networks over interchange rates. Facts: Retailers and businesses have many choices on what payment methods they wish to accept. They can accept cash, checks, or other emerging alternatives such as PayPal and mobile payment providers. Many retailers and businesses choose to accept debit and credit cards because, for both them and their customers, they are faster, safer, more reliable and more convenient than cash or checks. Retailers and businesses also have the option to offer price discounts for non-card transactions, leaving it to customers to decide whether they want to pay for the convenience of paying with a card.
 
Many businesses and retailers have successfully negotiated the price they pay to debit card networks.
 
Myth 8: Consumers paying by cash and checks subsidize debit card transactions.
Facts: Accepting cash or checks is not free (see Myth 3 above), and subsidization arguably runs in both directions. Non-card customers impose costs on retailers through the extra expenses associated with counting, bundling, transporting, and safekeeping of cash and checks. Losses from theft and counterfeiting further increase these costs, which may be greater than the cost of the interchange fee.
 
Myth 9: The Federal Reserve's rule, as required by the Durbin amendment, is a free market solution, not government interference in private business.
 
Facts: The Federal Reserve's proposal puts an absolute cap on what fees may be charged, a cap that doesn't begin to cover the costs of providing debit card services, despite Senator's Durbin's statement that the amendment “would not set interchange prices.”
 
In effect, the proposal will have a chilling effect on the willingness of financial institutions to invest time and resources into the creation and development of new or improved debit card system products and services. No bank or any other business will continue to invest in an existing system, let alone create a new and improved one, if the government will insert itself after the fact and redesign the entire business model so that there is no recovery of costs, let alone a return on investment.
 
Myth 10: The Federal Reserve's interchange proposal will help small businesses.
 
Facts: Because the proposed rule does not allow for adequate recovery of costs related to fraud protection, the integrity of the entire card payments system could suffer. This would not help anyone, especially small businesses that may be targeted by fraudsters and have fewer resources to devote to fraud protection measures.
 
Myth 11: Congress enacted the interchange regulation after a thorough review of the need and its potential impact.
 
Facts: The Durbin amendment was attached to the Dodd-Frank regulatory reform bill near the end of the debate and despite the fact that there were no hearings on the amendment nor any analysis of its impact on businesses, consumers or small institutions. It was rushed through the Senate and became law despite the House having had no opportunity to vote on it, an amendment that had no relation to the other provisions of the Dodd-Frank Act.
 
Myth 12: Interchange regulation has worked in other countries that have passed regulation.
 
Facts: In Australia, interchange regulations were enacted and as a result consumers ended up paying more, losing rewards, and didn't see any difference in prices at the register. Australian retailers, on the other hand, increased their profits. According to Charles River Associates International, a research organization, the regulation resulted in Australian consumers paying $480 million in additional fees.
 
Myth 13: Interchange rates have skyrocketed in recent years.
 
Facts: Interchange rates have remained relatively stable for many years. However, the number and type of retailers and businesses that accept cards for payment has exploded in recent years, as has debit card usage. At most, debit card interchange fees account for just over 1 penny for every $1.00 transaction, and the revenue it generates is used to pay for fraud protection for a card payment system that can handle as many as 10,000 transactions per second.

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