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  • Are Credit Card Interchange Fees Ripping Off the American Consumer?

    By: David Evans on June 12th, 2008

    Well, no, since you asked. A recent article in the St. Petersburg Times illustrates the confusion over what interchange fees are and how they work. According to the journalist, the average American household will pay $427 in interchange fees this year. Of course, no American household has ever gotten a bill for interchange fees. Interchange fees are paid by merchants to the bank that handles their cards, which then passes the money on to the bank that issued the card to the consumer. What does the merchant get for those fees? Well, they get paid even if the card issuer doesn’t get paid and they are even covered for the risks of fraud. But most importantly they make some additional sales because their customer was able to pay, and possibly finance, conveniently. You can question whether this is a good deal or not, but face it: millions of merchants have chosen to accept cards precisely because the benefits exceed the costs.

    Of course, as every high school economics students knows, consumers ultimately bear all costs in a perfectly competitive frictionless economy. So if merchants were atomistically competitive like they are on the blackboard in intro econ courses merchants would pass on all the interchange fees in the form of higher prices. Of course that’s true for everything else as well. Consumers pay for the rent that merchants pay to shopping mall owners. Just think how much consumers pay for all that advertising on nightly television–consumers who buy the advertised product pay those ads too. It is true–but absolutely trivial–that consumers pay for interchange fees; they pay for everything to some degree.

    Merchants, for better or worse, aren’t the perfectly competitive producers you saw on your professor’s blackboard though. In the real world, there are many retail segments where merchants have some market power. In this case, they don’t pass on all of their costs to consumers–some of their costs come out of profits. Anyone who believes that the merchants are spending all of this money lobbying for a reduction in interchange fees because they are going to give it all back to consumers is smokin’ something.

    I’m not suggesting the interchange fees are a good thing or that the card networks shouldn’t take the merchant complaints seriously. Any business that has half of its customers engaging in an open rebellion should be very worried. But if merchants have a gripe, they should look to the market and not to government to solve their problems. They can embrace one of the new lower interchange fee systems. They could start their own system. Or they could just say no to cards and offer consumers lower prices.


    2 Responses to “Are Credit Card Interchange Fees Ripping Off the American Consumer?”

    1. 1 Del Tonguette

      Interchange fees were originally developed in the early days of regional and national credit card programs to offset the fraud and collection losses, of the issuers, that were anticipated because of mass issue and the unknowns of the credit card market. They have survived to this day, because the credit card pioneers (I am one of the ‘pioneers’) are the very ones that went on to develop debit card, POS and ATM shared programs. When it came to compensation of parties, we took the easy way out and initiated interchange rather than develop a new card payment system.

      Interchange fees are way past their useful lifetime and should be discarded for newer and more fair payment systems. The government should not be allowed to enter this arena; it is up to the issuers and acquirers to get together and agree to and implement new payment strategies. Everyone will win…including the consumer.

    2. 2 bill

      no but banks or all racing to raise their interest rates some or now more than 30 percent people or so upset with our leaders for letting this happen that they are screaming mad banks get bail out and the fed lends them money at almost no interest no we or know who banks squander money

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