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.
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Filed Under: Payments, Regulation, consumers, Economics