Interchange activism is missing the point

In the green sheet this morning, there was a good article about how credit card interchange is still under fire. Especially since some of the more signifigant updates with the interchange schedules this April (Visa adding a new category of cards), interchange is again under the microscope.

At least a dozen bills pending in state legislatures address topics related to interchange, according to the NCSL. Here’s a rundown of several key initiatives:

• Two bills introduced in the Florida state legislature would require refunds to merchants paying interchange on sales taxes.
• Legislation pending in Kansas would require that merchants have better access to information related to interchange rates. It also defines interchange fees for purposes of state law.
• A bill pending in Nevada would prohibit interchange on certain transactions.
• In Oklahoma, legislation has been introduced that would prohibit certain contract provisions regarding merchant transaction fees.
• Lawmakers in Tennessee are considering legislation that would cap at 0.75% all processing fees associated with credit or debit card transactions. The proposal would apply to contracts entered into with merchants by banks or their agents after July 1, 2007.
• Texas lawmakers have a bill before them that would require more transparency in disclosing interchange and related processing fees. A tougher bill, introduced and quickly withdrawn in March after a large consumer letter-writing campaign, would have allowed retailers to surcharge credit and debit card payments to cover processing costs.
• In Washington state, lawmakers want to restrict interchange to 1.5% of the total cost of a retail card transaction.

Now, I can completely agree that interchange needs to be more transparent. As far as showing how much interchange is paid, itemized for every transaction that a business processes, it may be a little excessive. Imagine a business that processes a million or even ten thousand transactions per month, have fun with that statement.

From what I read on a weekly basis, lawmakers and interchange activists often completely miss the concept of interchange, and therefor are not developing strong arguments in trying to get interchange reduced or even more transparent.

Here’s what I think needs to happen before any major interchange changes are made:

1. The first step in making any progress towards a more transparent and potentially lower interchange, is going to be a more widespread understanding of what interchange is and where the fees go. There is so much inaccurate information and opinions as to what interchange is, and what it is being called, that it is hard for anyone outside the industry to know what is fact.
2. There needs to be a much better understanding of who interchange fees actually are paid to (Most of interchange does not go to Visa or MasterCard).
3. There needs to be an understanding of what processing fees are, in relation to interchange. (Tennessee capping processing fees to .75% is going to do nothing but stop Tennessee businesses from being able to accept credit cards.)
4. There needs to be some understanding that the billions of dollars in equipment that makes up the processing networks costs billions of dollars to maintain. Also, Visa, MasterCard, all of the processing banks, ISO’s, MSP’s, and other organizations that are needed to actually provide the processing services, employ tens of thousands of people and can’t run for free. (Yes there are many overpriced organizations out there, and ones that are just trying to rip business owners off, but there are good ones too.)
5. Someone in congress is going to have to start caring before anything changes. Currently, there aren’t any congressman that have shown any remote interest in regulating interchange on a national level.
6. Card holders are going to have to stop getting cards with huge rewards programs. Interchange categories are based on rewards programs associated with specific cards. This is also the reason that interchange is so complicated and keeps getting more expensive. The more rewards your card has, the more that a business has to pay to process it.
7. Most Importantly: Consumers are going to have to take interest in what businesses have to pay to process their credit card. The sad fact of doing business in the US is that nobody really cares about how much a business has to pay for anything. If consumers started complaining about interchange, you can be damn sure that things would change quickly, but as long as consumers are happy with their super rewards cards, and they still want faster, more convenient ways to pay, interchange will go nowhere but up.