Interchange Fees and Financial Reform

The issue of interchange fees, commonly known as swipe fees, should be a concern for anyone who holds a credit or a debit card. Since their introduction, both credit and debit cards have been working under a system where the merchant pays for their costs. Under this system, plastic has flourished, yet merchants have been trying to shift the costs to consumers for some time. This is starting to change, thanks to the financial reform legislation passed by Congress on July 14, 2010.

What Do Different Payment Methods Cost?

If you are a merchant, you have many options for accepting payment including cash, check, money order, traveler’s checks, debit, credit, direct bank withdrawal or an alternative payment system such as PayPal or Google Checkout. Clearly some solutions do not fit the application. Direct bank withdrawal works great for paying your mortgage, but are a terrible way to pay for a cup of coffee. Likewise, cash is never accepted for mail order purchases. If you eliminate the options that are clearly not suitable for most day to day transactions, you are left with cash, checks, debit, and credit. Each has it’s costs and its benefits to both the consumer and the merchant. Cash carries a large risk of theft which therefore increases its cost to both the merchant and the consumer. Consumers risk loosing their cash if they loose their wallet or are robbed. Merchants risk loosing cash to theft from employees as well as break ins and armed robberies. This is no small consideration for convenience stores. To mitigate these risks, merchants purchase safes, cameras, and other security devices. They pay for background checks on employees, and they pay for employees time when they count and recount each cash register before and after their shift. Accepting cash also takes up a considerable amount of an employee’s time during each transaction. Finally, they pay for the cash to be taken to a bank, typically by an armored vehicle service.

When accepting a check, a merchant takes the risk that the check will bounce. Usually, merchants ask for all sorts of identification when accepting a check, further lengthening the transaction time and increasing it’s cost.

When a merchant chooses to accept debit or credit cards, they incur none of these expenses. Transactions occur quickly, without having to produce exact change. No employee can steal the proceeds from the transaction, and the bank guarantees payment of all approved transactions. Credit cards, and to a lesser extent debit cards as well, benefit merchants by encouraging consumers to spend. While a credit card is also a method of finance, even debit card holders will spend more freely when they do not have to handle cash.

While the costs of accepting cash and checks fall directly to the merchant, the costs of accepting credit and debit cards are paid by the banks, who then charge participating merchants interchange or swipe fees. The merchant pays the swipe fees as a fixed cost plus a percentage of the transaction.

Why Should Merchants Pay?

As I have shown, merchants derive a significant value from their acceptance of credit cards and debit cards. No merchant has to accept credit or debit cards, however most have decided that their value exceeds the interchange fees. Nevertheless, merchants have been waging a political battle for years in order to get Congress to pass laws shifting the costs to consumers. While consumers do derive value from the convenience of credit and debit cards, these products would never have achieved acceptance had consumers been forced to pay a surcharge for each transaction.

Merchants have stepped up their propaganda that tries to make people believe that swipe fees are costs directly passed on to consumers. Some even content that they are like a tax on consumers. Nothing could be further from the truth as swipe fees are just another cost of doing business that merchants incur.

Merchants do have a point when they say that their interchange fees are inflated beyond the cost of the transaction. Much of the interchange fees for credit cards goes towards cash back or loyalty point type rewards for cards with no annual fee. The fees for debit cards help to create a system where banks can profitably offer free checking accounts to low income individuals. If Congress ever allows merchants to shift these costs to consumers, it is likely that both reward cards like cash back credit cards or gas credit cards and free checking will become relics of the past. Each transaction will have the possibility of a credit or debit surcharge and wise consumers will go back to cash and other forms of payment. Without any revenue from debit card interchange fees, banks will stop marketing free checking accounts to anyone but wealthy individuals. Banking will return to being a luxury service for the well off.

Fortunately, the latest compromise in the financial reform bill has some exceptions for smaller banks so that hopefully they will continue to be able to offer free checking. Merchants will be able to set minimum and maximum charges for credit card transactions, but the interchange fees for credit cards will escape regulation. It remains to be seen how the other restrictions in the bill will play out on the debit card market as a whole.

This post today is courtesy of Mr Credit Card from

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