The Dodd-Frank Act included an ABA-opposed provision authorizing the Federal Reserve to set rates on the interchange price banks charge retailers for debit card transactions. Other proposals, both domestically and internationally, have been gaining currency to set price controls or other restrictions on interchange fees.
ABA believes that interchange rates and governance should be set by the free operation of the market forces in the private sector. ABA opposes policies that direct state or federal governments to set price controls or otherwise regulate interchange rates, which currently are set by the private market through contractual relationships.
In recent years there has been a concerted effort by some to have the government regulated interchange fees to make them lower. In 2005, retailers and their trade associations, alleging that interchange fees are set illegally, filed 41 class action suits in federal court. In 2010, Congress passed the Dodd-Frank Act, which included a provision directing the Federal Reserve to set the rates banks are allowed to charge retailers in exchange for banks' debit-card transaction services.
Interchange is a fee for an array of services provided to merchants that are highly valued and beneficial to both merchants and consumers.
Merchants benefit from the services credit and debit cards provide in a number of ways:
- They are guaranteed payment In contrast, checks can be returned
- They suffer fewer losses because cards replace cash, which can be lost or stolen, including by employees
- They are able to serve customers more quickly and efficiently because there is less cash to be counted and sorted and fewer checks to be written, verified, and stored
- They receive faster credit for their sales
- They may have more sales because customers are not limited to the cash in their wallet or money in their bank account in the case of credit when deciding to make a purchase
In addition, credit and debit cards not only benefit merchants relying on in-person sales, they have made internet commerce possible.
It is also worth noting that merchants can always, and some do, offer cash discounts if they wish to avoid interchange fees.
Customers benefit because of the following:
- They do not have to carry large amounts of cash which can be lost or stolen
- They are protected from any losses if the card is lost or stolen
- They don't have to anticipate every purchase in advance and ensure that they have sufficient cash in their wallets
- They can take advantage of sales by using a credit card if they don't have sufficient money in their bank account at the time of the sale
- They can shop online more easily
- They proceed through check-out more quickly
In contrast, banks bear the risks and costs of providing this valuable, modern service. They pay for the cost of the following:
- A reliable network available 24/7 and around the world that processes billions of transactions a year
- The cost of fraud losses and fraud prevention efforts
- Providing the cards and developing and maintaining the customer relationship
In addition, they use the interchange revenue to continue to innovate to create new, better and more flexible products, that benefit both businesses and consumers.
When interchange fees are capped, fraud and other costs will be made up elsewhere, as demonstrated in Australia. There, retailers successfully lobbied for the government to interfere in the private market and cap interchange fees. The result was not lower prices for consumers as retailers had promised; it merely resulted in a higher cost of credit as banks charged new and higher fees on credit and debit cards in order to make up for the resources lost from interchange price controls. The cap on interchange fees ultimately caused a shift of costs from retailers to consumers, something ABA opposes as bad public policy and bad for the economy.