The British Retail Consortium (BRC) is championing the elimination of card scheme interchange fees for merchants in the UK that accept credit and debit cards. Interchange fees represent the largest portion of the fees that merchants pay to accept payment cards and are remitted back to card issuers to help support the operation of the interbank clearing networks.
According to the BRC, consumers in the UK use a debit or credit card for more than 80% of their total retail spending, and combined with a 22% increase in debit interchange fees, has been a significant cost burden for merchants.
“Amidst a backdrop of mounting costs from Covid, Brexit, global supply chain disruption and rising commodity prices, these excessive card fees add further cost pressures to retailers,” the retailer lobby group states. “Equivalent to £46 per household per year, these additional costs can translate into higher prices for consumers.”
The movement in the UK is the latest in a global pushback on card brand fees, following the regulation of interchange fees by the Australian government in 2003 and in the US under the Dodd-Frank act in 2010.
The construct of the payment card industry defines the interchange fees that a card issuer receives based on a variety of factors including the type of card and circumstances of the transaction. Interchange fees are set by the card brands such as Visa and MasterCard and are designed to provide a revenue stream to card issuers to offset operating costs and fraud losses.
When payment cards first came into wide use in the 1980’s, merchants were happy to pay a fee to accept them because shoppers paying with a card would routinely buy more and return more often. In addition, merchants received their money the next day, there were no bad checks, and fewer trips to the bank at night after the store closed with the night drop bag full of cash meant less robbery risk. Fees that merchants paid to accept cards represented good value for the merchant.
Over time, and as cards became increasingly ubiquitous, the solutions that card payments brought faded into history, and the fees were increasingly viewed as a burden on merchants. Opponents argued that these costs borne by merchants represented nothing less than a “tax” on consumers as merchants raised prices to cover their card fees.
High school economics taught us that the price of a carton of milk is set by the market….if the price is too high, consumers won’t buy milk, and if the price is too low, dairy farmers will make the milk into butter or cheese that sells for a higher price. When the price of milk is just right, the market is in “equilibrium” and both buyers and sellers get the most value.
It’s the same with payment cards, if the fees are too high merchants won’t accept the cards, but conversely if they are too low, banks won’t issue cards to consumers. In the US, we are now seeing card issuers compensate for lower regulated interchange fees with average interest rates of 16.30% on cards that carry balances despite a Fed funds rate that has been way below 1.00% for some time.
The payments industry is complex and has many stakeholders, and like any market operating in equilibrium, consumers, merchants, and banks realize the most value. Regulating only part of the market, e.g., interchange fees, disrupts that equilibrium and causes unintended consequences as the market self-corrects.
Overview by Don Apgar, Director, Merchant Services Advisory Practice at Mercator Advisory Group