CHICAGO — U.S. consumers would likely face credit or debit card surcharges and see their credit and debit card rewards programs disappear if the federal government decided to cap or cut credit and debit card interchange, according to international regulators attending a recent payments conference.
Regulators from Australia, Mexico and the European Union who have had experience with the card interchange issue addressed the Federal Reserve Bank of Chicago's 2009 Payments Conference May 14 and 15.
John Simon, chief manager for the payments policy department of the Reserve Bank of Australia, led the international presentations. Australia introduced a series of card interchange changes in 2002. These explicitly allowed Australian retailers to discount purchases by cash or other payment methods and to surcharge payments by credit and debit card. They also narrowed the differential between credit and debit cards and prohibited any card issuer from blocking merchant acceptance of other card brands.
Card issuers fighting the reforms at the time predicted that popular credit card rewards programs would likely go away, and Simon acknowledged that the number of cards carrying rewards programs had dropped. But he also reported a steadily growing percentage of merchants surcharging on credit and debit card transactions.
“In larger merchants, we have seen the numbers surcharging particularly rise because of the utilities,” Simon said. Utilities have moved to using surcharges on card transactions in part to help drive consumers to using other electronic means of payment, such as electronic check transactions, he said, adding that very small merchants were driving consumers toward cash.
In response to a question on whether consumers should pay for a payment method that benefited primarily financial institutions and merchants, Simon countered, “Consumers always pay for payments. All we have done is to help make the costs more well-known so that consumers can make the choice.”
Hitting close to home in the U.S., Simon also acknowledged that there was no evidence to support a frequent merchant claim about the benefits of lowered card interchange. Simon acknowledged that there was no evidence this had happened in his country.
“That is a very hard question to answer,” Simon said when responding to a question from a conference attendee. “There are so many different things that might go into a price change of a 98-cent can of Coke to a 96-cent can of Coke that it's impossible to say whether or not that reflected the lowered interchange rate or something else, a global economic downturn, for example.”
Simon insisted however, that in a rational, competitive economy his department had to assume that lowered interchange rates would eventually lead to lowered prices for goods and services.
Other conference attendees expressed the opinion that the money previously spent on card interchange had instead been pocketed by the merchants that generally have not cut prices.
Jose Negrin, senior economist with Banco de Mexico, reported that Mexican regulators had stepped in to lower card interchange in an effort to expand card usage and access.
Negrin told attendees that Mexico had a developing economy that primarily views card interchange not as a competitive topic or as a contest of issuers versus retailers but instead as a barrier to the overall growth of the country's entire payment system.
“We have one of the lowest numbers of cards per inhabitant of anywhere,” Negrin explained, “and consequently one of the lowest numbers of points of service where we can use our cards of anywhere.” Mexican authorities intervened in card interchange, he explained, when it found that the existing interchange structure limited development of the payments network, the numbers of cards and point of sale terminals and debit card use to almost entirely ATMs even though they could be also be used at point of sale terminals.
The Mexican system also differs from the U.S. and Australia in that the payment networks in Mexico are largely controlled by card-issuer associations, and the government was able to “firmly suggest” interchange rates should move lower without having to pass any new laws or additional regulations.
Since the changes were first put into place in 2004, Negrin reported, both the numbers of cards per inhabitant and the number of point of sale terminals in the country have risen, allowing the country to move farther away from relying entirely on cash.
“I think one of the lessons Mexico has learned is that the foundations of a payment system matter a great deal in how an overall structure will develop and that governments have an interest in those foundations,” Negrin said.
Jean Allix, a principal administrator with the Directorate General for Competition at the European Commission, offered a controversial presentation. The European Commission has been involved in a series of disputes with both Visa and MasterCard over their card interchange rules and has forced MasterCard to back off the interchange rates it charged for transactions across European borders. It also forced the card brand to reverse a previous decision to increase its fees on merchant banks in an attempt to recoup some of the lost income.
MasterCard is fighting both decisions in European courts and has said neither move is finalized yet.
MasterCard executive Josh Peirez, who participated in a different panel during the conference, stated, “I want to clarify that MasterCard has not just willingly backed away from what it believes is a fair and very competitive fee structure in Europe. In Europe, the system may seem a little backwards to the United States. In Europe, companies can only fight regulatory rulings after they have been implemented.”
Because the situation in Europe is in flux, Allix could not report on any final conclusions, but he characterized the card brand's argument as “stupid” and “anticompetitive” on their face.
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