Visa has [1] increased its interchange fee rate again, continuing a trend towards higher interchange fees. Merchants will no doubt complain about the rapacious card systems and policymakers may increase their scrutiny of the systems that handle an ever expanding portion of transcations in this country.

But before everyone gets of their cudgels it is important to understand that MasterCard and Visa are just doing what they have to do given their business model. These catalysts bring cardholders and merchants together on the same platform just like American Express does.

But they don’t do that directly. Each system has to persuade banks that issue cards and banks that sign up merchants to do that under its brand name–whether that’s MasterCard or Visa.

They face two problems that limit their ability to lower interchange fees. First, the business model in the card industry has entailed charging low prices to cardholders to encourage adoption and use and making profits on the merchants. MasterCard and Visa didn’t invest this–Diners Club did in 1950, American Express followed in 1958, and everyone else has since.

Second, acquiring merchants is a commodity business so the real power lies with getting big banks to issue cards. MasterCard, Visa, and recently American Express are competing for these banks to issue their cards. The main weapon: the interchange fees the systems require acquirers to pay issuers. And, if Visa wants to compete, it has to raise interchange fees.

Moral outrage won’t change these business models, but merchants can look for other alternatives and many entrants into payment cards are offering those. If more merchants transactions away from MasterCard and Visa those systems will have to pay attention even if it means losing some banks.

Of course, some merchants are looking to the courts or legislators for relief. I’d like to see the marketplace resolve this one which is ultimately a battle between merchant-friendly systems and cardholder-friendly ones.

[2]