Why credit card interchange sucks and probably isn’t going to go down…

There has been a growing attention to the credit card interchange system in the US, ever since Visa and MasterCard declared that they were going to publish their interchange fees. Another source of the growing curiosity is the huge surge in consumer and business interest relating to the fees paid for the ability to accept credit cards.

Visa released their interchange fee structure first, producing the 4 page table that many people in the industry have come to know. MasterCard released a similar but excessively long 72 page monster fee schedule soon after Visa.

Both of these papers make interchange into an improbably difficult web of fees and charges that nobody can easily understand. Even after several years of experience in deciphering them I have to admit that they are extremely complicated. Taking a look at who these fees are actually going to, and the fact that both Visa and MasterCard are now public companies, there are many professionals in the processing industry that are predicting it is just a matter of time before something breaks, and then something changes.

Why is interchange so complicated?

First off, the interchange structure was never meant for consumers to understand or even see. While I don’t advocate this idea, it was a fact until about a month ago until the interchange fee structures were officially released. In fact, it is specifically written in an ISO’s contract with Visa and MasterCard that they will not print or disclose actual interchange fees to the public or even to their customers. These fees were released almost completely unedited, and because of this it makes them difficult to understand from an outsider’s perspective.

The main reason that interchange is so complicated is the quantity of business types and acceptance methods that find themselves on the interchange tables. You have a variety of businesses, retail, keyed entry, quick service restaurant, business to government, ecommerce, gas station, and hundreds more all wanting to accept credit cards. Because fraud probability plays a huge role in the actual interchange fees, it is assumable that it is going to be a complicated structure based on the number of different business types and the fraud that goes with those types. Restaurants have a very low chance of fraud, while gas stations and ecommerce statistically have a very high chance of fraud. Visa and MasterCard decided a long time ago that low fraud industries shouldn’t be charged as much as the high fraud ones, and the list got really big over the years.

The Interchange Problem
The problem with the whole system is that Visa and MasterCard have a complete monopoly on credit cards, and that’s not something that is going to change anytime soon, if ever. Visa and MasterCard also control a huge amount of the physical networks that facilitate the transaction processing and the connections between different banks and processors. They currently have control in nearly every way imaginable over a credit card transaction through every step that it takes.

What makes the situation even more complicated, is that the banks that control Visa and MasterCard are also the banks that issue credit cards. These banks take the biggest cut of interchange fees, and they collect they collect the most from consumer interest on their credit cards. On every transaction they get paid from the business’s processing fees, and interest collected from the consumer.

So what’s going to happen?
What I would like to happen, is for Visa and MasterCard to drastically lower the interchange across the board. Processors can provide a better valued service to their customers, and businesses everywhere pay less to accept payments from their customers. Businesses are happier, and more money goes to their bank accounts, or back into their businesses to help further push sales and growth.

What I think is actually going to happen…
Unlike some industry professionals, and many rumors floating around, I don’t think that interchange is going to go down. At least not enough to make any major difference. The fee structures may get some formatting and clarification, but overall on the individual business level, I expect very little change as far as the overall cost of processing is concerned. As for processors, they may see some changes, but again, it’s unlikely that these events are going to drive interchange down. These companies are now in the business to make their shareholders happy, so going public was a step in the opposite direction of lowering prices.

Anti-Interchange Campaigning
There recently has been a major growth of anti-Visa/MC/Interchange websites aimed at bringing interchange to it’s knees, or at least down a few notches. Websites such as waytoohigh.com have been gaining some very widespread media attention. Waytoohigh.com is run by the two lead plaintiffs of a major class action lawsuit against Visa and Mastercard. While I admire their effort and completely understand their anger, I think that their are some major inaccuracies in their arguments, and in the end their efforts are going to be in vein. Trying to get things like interchange fees printed on every retail receipt, and attempting to shift the cost of interchange to appear as a consumer tax makes their argument come across as unprofessional and simply inaccurate to me.

Standardizing interchange could hurt many businesses
Your typical retail store or restaurant pays between 1.7% and 1.9% per transaction for their credit card processing, not counting downgrade charges. A website pays closer to 2.5%. By standardizing interchange, only one thing is going to happen. The high rate would be adopted by more industries, making credit card processing more expensive overall. I’m sure that every online retailer would love to see a 70% reduction in their processing costs, but it just isn’t going to happen.

When is the last time that you saw a public company cut prices to their consumers without getting something in return? Do you think that Walmart doesn’t know exactly what and where they gain when they make a sale that lowers their revenue? Do you think Google buys a video sharing website for billions of dollars only for the purpose of providing a useful service to their customers?

In the end there is no easy solution:
Visa and Mastercard don’t have to lower their prices, because there is nothing that they will gain from it. People will accept Visa and MasterCard as long as those systems remain the most widely used and convenient ways to pay for something.

Additionally, when Walmart won it’s lawsuit against Visa and MasterCard relating to debit card use, the interchange across the globe coincidentally went up .1% immediately afterwards. So, we can see how well it works in everyone’s favor to win lawsuits against the card companies.

I think that for any major change in interchange pricing to happen, it will take an act of congress. But, the question that remains in my mind, is whether congress would attempt to regulate something in an industry they have very little control over, that would impact the movement of billions of dollars every year, and the US economy in general?