The publication of a report on 15 May by the
Government Accountability Office (GAO) regarding the level of
interchange fees in the US has given both banks and card networks
fresh ammunition as they face off with retailers.
A House Judiciary Committee antitrust task
force is currently investigating proposals to introduce the Credit
Card Fair Fee Act, which aims to give merchants more power to
negotiate the level of interchange fees. However, the GAO report
claims that not only have federal agencies benefited from the use
of credit and debit cards for payments through increased customer
satisfaction and operational efficiency, the oft-repeated mantra of
the retail industry – reducing interchange fees benefits the
consumer – has not been borne out by experience in other countries,
most notably Australia, where regulators intervened in 2003 to
reduce the level of interchange.
In a statement released by the American
Banker’s Association following the report’s publication, Kenneth
Clayton, senior vice-president of card policy, stated interchange
revenue is essential to reimburse card issuers for the numerous
costs related to the process.
“The report also identifies ways in which
entities can try to reduce the fees associated with card
transactions,” added Clayton. “These include negotiating with card
networks for lower interchange rates, replacing manual card
machines with wireless terminals, expanding PIN-based debit
capabilities, and switching to more efficient ways of connecting to
card networks when processing transactions.”
This is something that MasterCard has picked up
on as well.
“Even though this is a basic commercial
dispute, merchant lobbyists appear to be casting aside existing
opportunities to negotiate in favour of congressional intervention
in the form of price control legislation,” said Joshua Peirez,
chief payment system integrity officer at MasterCard
“This is a significant addition to the current
interchange investigations, providing a credible argument to
counteract the merchant arguments and lobbying,” said Francesco
Burelli, cards and payment specialist with business strategy
consulting firm AT Kearney.
“Previous arguments from card scheme providers
would not have been considered in the same manner as they were from
interested parties. This report cannot not be dismissed
The GAO’s report noted that recently released
data from the Reserve Bank of Australia (RBA) shows total fee
income from credit cards used by householders rose by 12 per cent
in the last financial year, and by 170 per cent over the past five
years since the regulation designed to curb the level of
interchange fees was adopted. While local consumer watchdog group
Choice has pointed to the growing fee income from over-limit and
late payment fees and foreign currency fees on credit cards – up 16
percent over 2007 – the Australian Bankers’ Association argued the
reason for higher credit card fees in recent years was the enforced
cuts on interchange fees.

Consumer inevitably loses

However, a recently published report from global consultancy firm
CRA International has argued that while merchants in Australia have
benefited from stronger margins due to the regulatory measures,
retail prices have not gone down. Combined with the increase in
card fees, it would appear that the consumer is inevitably the
losing party.

According to the RBA, a sizable 45 percent of
the adult population do not own a credit card, so it has argued
that whether or not they have benefited from the lower cost for
retailers to accept credit cards, the increase in card fees are not
borne by a significant number of consumers.
As the interchange debate in Europe continues
to rumble on, it is almost certain that proponents of the current
system of interchange will refer to the findings of the GAO report,
according to Burelli.
“Regulators tend to watch each other and take
reference of each other’s initiatives,” he explained.
“We will have to see how the European Court of
First Instance is going to take this new piece of evidence into
consideration when deciding over the recent European Commission
rulings against cross-border interchange and how the commission
will consider it within the context of the interchange
investigation launched recently.”

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