The Great Interchange Debate: You Get What You Pay For
Interchange. Credit unions love it and merchants hate it. However, merchants are being more than hypocritical in suggesting credit unions and other financial institutions cap debit card interchange fees. Every business generates income on fees for products and services, and interchange is no different. They've so much as admitted it in arguing that prices would decline if interchange were kept in check; retailers are charging consumers for using plastic.
Financial institutions are providing a valuable service to the merchant that they are rightfully paying for. The ability to accept credit and debit cards brings more money into the retailers' shops as a convenient way for consumers to pay for purchases and track their spending. From the standpoint of efficiency, debit is speedier for busy retailers than accepting cash and counting out change, not to mention lower losses due to robberies.
In addition, accepting cards protects merchants and consumers from fraud. The Heartland data breach alone-made possible by a weakness in the retailers' security as the majority are-led to estimated losses of $130 million. Interchange is like an insurance policy for the retailers: Something you hope you never need, but you know you need and you pay the going rate for that service.
Should this Senate amendment be accepted by the House and become law, two things need to happen. First, retailers must be required to fortify the security of their systems to the same level that financial institutions do. Second, if this is truly a hidden tax on consumers as they claim, then the cost of goods available to consumers must decline by a rate comparable to the interchange fee the retailers would have paid. This has not been the experience in Australia and likely won't be here in the States either.
One amendment would permit retailers to not accept certain cards; it would be interesting to see what would happen. I can just imagine the customer backlash when a consumer goes into a retailer that formerly accepted the card but no longer does because of the interchange fee. What percentage of the clientele would not go back? It would seem easier to change where you buy your shoes than your credit card.
Fortunately, Congress' self-serving effort to guarantee that the interchange fee for the government, a heavy user of credit cards, is the lowest possible rate is out. The attempt was a flagrant and unconstitutional conflict. If the government is that big a user of credit cards, it already gets a great rate based on volume anyway.
Both national trade associations were busy e-mailing members to write and call in to their members of Congress opposing the measure. CUNA has even organized a fly-in on interchange for the second weekend in June. Total interchange income at credit unions in 2009, according to Callahan & Associates, was $3.3 billion.
Areport from the apolitical Government Accountability Office last November did not find any need for interchange to be regulated in the United States. It cited both sides of the argument, including retailers' claim that it would save consumers money. That decreased income for the card issuers would have to be made up elsewhere; it's only an argument on where the fee comes into play because the consumers are going to pay either way. Retailers have shrewdly framed the issue as a "hidden tax" on consumers imposed by the banks that led to the financial meltdown-a meltdown that has hit retailers' bottom lines.
"Interchange rates had nothing to do with the financial crisis and are outside the scope of this bill. As an appropriate next step, the provisions of the Senate amendment should be studied by the Congress to begin to understand the real world impact to consumers and the marketplace," a joint letter from CUNA and the Independent Community Bankers of America to members of the House read. Since when did the germane come into play in legislating, despite the fact it's a rule covering amendments in the House? The Senate, however, has no such restrictions on amendments, and thus sausage is made.
And as CUNA, NAFCU and ICBA have stated, the carve-out for smaller institutions does no good because the cap on the institutions over $10 billion in assets acts as a de facto price regulator on smaller entities as well. In fact, interchange is what allows community banks and credit unions to compete with the big guys in cards.
For-profit retailers are positioning themselves as fighting for the people in this cause, while credit unions do this every day. CUNA and ICBA came back with a solid left though in their framing of the issue. The groups could have referred to the interchange amendments as a cap or ceiling, but that would intimate that fees are rising. Instead they made the interesting choice of "price fixing," colloquially used to describe shady conspiracies, and applied liberally.
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