Setting the Record Straight on Interchange
Merchants in the interchange debate continue to make outlandish and unsubstantiated claims about interchange fees and the electronic payments system — statements that are misleading, opportunistic, and outright false.
- Merchant Myth #1: Merchants can't negotiate their interchange fees. »
- Merchant Myth #2: Merchants can't offer a cash discount. »
- Merchant Myth #3: Retailers pay interchange fees. »
- Merchant Myth #4: Interchange fees are confusing. »
- Merchant Myth #5: Swipe fees are skyrocketing. »
- Merchant Myth #6: Merchants prefer all customers to pay with cash. »
- Merchant Myth #7: Swipe fees are higher in U.S. than in any other country. »
- Merchant Myth #8: The Durbin amendment actually helped community banks and credit unions because of an exemption. »
- Merchant Myth #9: Retailers pay three different interchange fee charges. »
FACT: Merchants can — and do — directly negotiate with the networks to lower their interchange costs through a variety of incentive arrangements with networks, including deals in which the savings are rebated to the merchant. Some merchants prefer to handle the negotiation through their association or other group arrangement. Entire categories of merchants have obtained lower interchange rates based on their particular business needs.
- For example, Visa and MasterCard capped interchange on gasoline sales and established lower interchange rates for categories of merchants such as grocery stores, utilities and convenience purchases. Also, merchants routinely switch processors for a better package and price — and therefore have a much greater ability to negotiate card acceptance costs than they do for most other business services, such as electricity, postage, water, or trash collection.
FACT: There is nothing prohibiting merchants from offering a cash discount. In fact, federal law allows merchants to offer cash discounts, and the card networks all make very clear in their rules that cash discounts are allowed. So the question becomes this: why aren’t they offering cash discounts now? Answer — because doing so would make them lose money. Merchants are profiting off of individuals who choose to pay with cash. What merchants really want is the ability to surcharge their customers at the register, pick and choose which cards they will and won’t accept from their customers, and the removal of penalties if they falsely advertise the cash discounted price.
FACT: A merchant does not pay the interchange fee directly — he or she pays a merchant discount fee, which is the blended rate. The Visa or MasterCard network transfers the interchange fee portion of the merchant discount fee from the retailer’s bank or card processor to the customer’s card issuing bank or credit union.
FACT: Merchants understand the exact breakdown of the fees they will pay based on the agreement they each negotiated with their acquiring bank, including the interchange fee. Since fees and costs are itemized on the bill from the retailer’s bank or card processor, each merchant can easily calculate their effective rate — the processing cost as a percentage of total card sales — to put interchange fees in the context of their enterprise. If a merchant is confused about their bill, they should ask for clarity from their bank or card processor — or shop around for a new one.
FACT: The weighted average of interchange fees as a percentage of volume has actually decreased since 2005, even with the significant advancements in technology, convenience, and new security and fraud protection measures — all advances that add significant value for merchants and consumers. In fact, in some significant sectors, interchange rates are decreasing even from lower-than-average levels. For example, supermarkets have always paid extremely low card acceptance rates — and that rate has decreased to around 80 basis points.
In the mid-2000s, debit card use in particular exploded; the 2010 Federal Reserve Payments Study found that 35 percent of all non-cash payments were made with debit cards, making them the most popular form of non-cash payment. As sales volume grew, so did the total amount retailers paid to accept debit and credit, as it was charged on a percentage of the sale. Overall, retailers were paying more overall to accept debit and credit as volume grew — despite the fact that the actual average interchange rates remained relatively steady over this same time period. As the chart below demonstrates, the rate that merchants paid to accept cards actually went down from 2005 to 2009, as purchase volume increased.
|Year||Purchase Volume||Total Fees Paid||Merchant Fees Weighted Average|
|2005||$2.651 Trillion||$48.56 Billion||1.83%|
|2006||$3.025 Trillion||$56.74 Billion||1.88%|
|2007||$3.526 Trillion||$60.82 Billion||1.73%|
|2008||$3.750 Trillion||$62.70 Billion||1.67%|
|2009||$3.663 Trillion||$62.06 Billion||1.69%|
Cash can be time consuming and costly. A study commissioned by Walgreens found that the company loses about $1.3 million a year due to the time required for cashiers to hand out correct change out to the penny.
However, with electronic payments businesses can increase their customer base and their net transactions. For instance, by accepting cards, the Salvation Army “cashless kettles” average donations went from $2 to around $15 when using credit or debit, a 650% increase. New York City cab drivers saw overall ridership and revenue increase and tips double over “pre-plastic” days.
FACT: The full amount that retailers pay to accept payments in the U.S. actually compares favorably to rates globally. When you compare the total cost of acceptance – including interchange, acquirer fees, and other elements – the U.S. is well below some other developed countries, according to a 2011 report by the Aite Group. In some countries, these fees are lower than in the U.S. because the government has interfered with the market and imposed price controls on interchange. These countries consequently have less innovative debit systems — often relying on PIN debit, making it impossible to make online debit purchases or to pay merchants without a PIN pad.
Merchant Myth #8: The Durbin amendment actually helped community banks and credit unions because of an exemption.
FACT: Community banks and credit unions will ultimately be harmed along with larger financial institutions. Despite the theoretical carve out for smaller institutions, merchants will likely be able to drive down all interchange fees because of the leverage gained by the Fed’s draconian price caps. The routing and exclusivity provisions, which will come into effect on April 1stand contain no such carve out exacerbate the negative impact for small banks as retailers begin to route more transactions over lower-rate networks. In order to survive and maintain their debit programs, these institutions will face an impossible decision to either increase fees, or stop issuing debit altogether. Regional financial institutions have already attributed the Durbin amendment to branch closures and job layoffs.
- IBC Bank of Laredo, TX is closing 55 branches and laying off 500 employees.
- Associated Bank plans to close 21 branches in its three-state territory of Wisconsin, Illinois and Minnesota in early 2012.
FACT: When a merchant accepts a card for payment, he pays a “merchant discount fee,” which is typically 2-2.5% of the transaction amount for credit card transactions — and less for debit. Retailers pay for card acceptance because of the value they receive — guaranteed payment, cash flow, and increased sales opportunities. Read more about What is Interchange.