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Interchange
Issue
Various proposals, both domestically and internationally, have been gaining currency to set price controls or other restrictions on interchange fees.
Position Statement
ABA believes that interchange rates and governance should be set by the free operation of the market forces in the private sector. ABA opposes proposals to have state or federal governments set price controls or otherwise regulate interchange rates, which currently are set by the private market through contractual relationships.
Explanation
In recent years there has been a concerted effort by some to have the government force lower interchange fees. In 2005 retailers and their trade associations, alleging that interchange fees are set illegally, filed 41 class action suits in federal court
Interchange is a fee for services that are provided to consumers and merchants alike. Maintaining the networks needed for speedy credit and debit card authorizations is costly. In addition, banks spend tremendous resources obtaining and retaining customers and promoting the use of electronic payments programs, which have proven highly beneficial to customers and merchants alike. Merchants receive the benefit of guaranteed payment and enjoy other benefits for which banks bear the expense. Banks not only bear the risks that consumers will not pay, and the costs of establishing and developing the customer relationship and putting cards into circulation, they also have the costs of building the payment infrastructure, monitoring for and assuming many of the costs of fraud, and carrying the costs of account maintenance. Merchants have at most a few of these costs or obligations. In fact, history has seen many merchants attempt to create their own credit card programs but exit the business because the costs were too high.
The strategy of imposing price controls on interchange ignores the fact that customers benefit as much as retailers benefit from the use of credit and debit cards. Electronic payments are safer and faster than handling cash, the risk of bounced checks is eliminated, good funds are credited to merchant accounts faster, customers are able to respond more quickly to incentives to do business when using credit or debit cards, and the growth of electronic payments has made the overall economy stronger, more efficient, and more productive. In addition, consumers have benefited from the interchange system because they, at little or no direct cost, avoid having to carry cash and have limited, if any, liability if their card is lost or stolen.
Furthermore, by law and network rules the banks, not the consumers or merchants, must bear fraud losses—which are mitigated by the interchange fee. If the interchange is capped, then the 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. This did not result in 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 resulted in a shifting of costs from retailers to consumers, something ABA opposes as bad public policy and bad for the economy.
Contact for further information: Nessa Feddis (202) 663-5433.
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