Interchange Fees – No Small Change?!
If you ever take a road trip through the American West, you’ll notice a lot of things. Beautiful mountains, endless prairie, and arid deserts all provide a stunning backdrop. Enough time on the road, and you’ll eventually start to notice something else—cheaper gas if you pay with cash.
Truck stops and gas stations along major highways have something in common, they prefer cash. Each time you swipe your credit card, your bank charges an interchange fee to the gas station’s bank. This cost is then passed onto the gas station, and often is quite significant, relative to the overall margins the station operator makes. The National Association of Convenience Stores estimates that credit card fees average around 10 cents a gallon and end up costing gas stations, convenience stores, truck stops and other retailers thousands of dollars a month.
High gas costs, increasing consumer awareness, and a strong push by merchant coalitions brought the issue of high interchange fees to Congress. The result: last week the US House (of Representatives) Judiciary Committee approved the Credit Card Fair Fee Act of 2008. The goal of the act is to provide retailers the opportunity to negotiate these fees (which are currently non-negotiable except for the largest and most powerful retailers) with credit card issuing institutions.
The Credit Card Fair Fee Act has yet to be voted into a law (it still has to pass through the Senate and be approved by the President), and chances are, it may never be. Opponents, like the American Bankers Association (ABA), have a strong belief that the current system is competitive and efficient. Says Edward Yingling, President and Chief Executive of the ABA:
“[The ABA] is very disappointed that the House Judiciary Committee voted today to move forward with legislation that is anti-competitive and interferes with the smoothly functioning electronic payment system that currently works to the benefit of consumers, businesses and the broader economy.”
The benefits of credit cards to merchants are many - customer satisfaction, guaranteed payment, theft prevention, improved efficiency and so on - but it is obvious that the value of these benefits is up for debate. Disruptive technologies and business models are challenging the status quo – I have written about alternative payment methods earlier (recent post on Bill Me Later and last year’s piece on Innovations in Retail banking.)
As technology becomes ever more ubiquitous, the ability to pay electronically will be a key sticking point for consumers. Mobile payments, touch-pay systems, and other innovations will only gain traction if they offer a sustainable value proposition to all parties involved in the transaction. The Credit Card Fair Fee Act draws attention to the issue, and hopefully the two sides will start to work towards an amicable, mutually beneficial solution to interchange fees.
For an always informative look at how the Interchange system works, visit Wikipedia.
For thoughts on the payments sector, visit author Aneace Haddad’s blog.
A more detailed analysis of the proposed bill is available at WashingtonWatch.com.
To find out what else is happening in the payments world visit Payments News.
Comments
"Mobile payments, touch-pay systems, and other innovations will only gain traction if they offer a sustainable value proposition to all parties involved in the transaction"
Very true, credit. I looked at my wallet today and found that everything in it, drivers license, SS card, Library card etc. are redundant. A person can carry just his/her mobile phone for identification.
Posted by: Radical Economist | July 29, 2008 07:39 PM