Credit Card Interchange Legislation

As promised, I’m going to spend a bit of time today discussing the (seemingly never-ending) discussion regarding interchange fees. In yesterday’s post, I discussed, in extreme brief what interchange is and how it is used/leveraged. During the process of researching the information for this missive, I found a common quote that provides a better description. The data was initially provided via JP Morgan, and has been since quoted widely

Of $100 charged to a Visa card, the merchant’s bank receives about $2.25, according to a hypothetical example used by J.P. Morgan in a June report. The bank forwards about $1.80 — the interchange fee — to the cardholder’s bank. Both banks pay a fee to Visa, 10 cents apiece. The merchant’s bank then pays another nickel to a third-party processor and keeps the remaining 30 cents.

Card Fees Pit Retailers Against Banks – NY Times

Many of the information regarding the debate that you read online paints the picture merchant vs. card brand…in a battle of decreased cost for the merchant, or decreased expense for the consumer.

But the issue is not that simple.

By now, if you have read others things I’ve written, I think you will agreement that the payments industry is a multi-sided market. This holds true for the segment of the payments industry that deals with credit. You will notice that I don’t reference “credit cards”…but simply credit. Why is that?

Quite simply, the issue addresses multiple participants, multiple players, an ecosystem of participants. Take the quote above as an example and let’s consider the participants involved in the workflow.

The consumer. The merchant. The merchant bank. The cardholder’s bank. The issuer (in the scenario above, Visa). The Processor.

In the scenario above…up to 6 participants. I acknowledge that these could, in fact, be the same players (the banks and potentially the processor). But the base assertion stands…

This is not a merchant vs. card phenomenon.

I am not arguing that the discussion of interchange is invalid. Nor am I arguing that each side of the equation has compelling points to discuss. I AM asserting that the coverage, and base level of information, regarding the discussion is overly simplified. Any issue that addresses multiple sides of an ecosystem cannot be addressed in an us vs. them manner.

There are 6 or more (or potentially fewer) participants and the regulation* of such an interaction is excessively complex and must be treated as such.

I do, in fact, have opinions on the discussion. However, this piece is intentionally focused on the mindset that must be taken when the discussion is broached.

To that end, I choose to close this post with a series of links providing some information from multiple perspectives. I’ve done my best to provide a balance of information from multiple perspectives. It, not surprisingly, took a fair amount of digging to come to a subset that I felt where particularly interesting, compelling, and relevant. You will notice that some date back to this time last year. That is due to the fact that the current legislation is, to a degree, a rehash of prior legislation submitted. Arguably, this is due to the passage of the Cardholders Bill of Right’s this year.

If you have interest in a greater level of discussion…I’m always happy to oblige.

I would encourage you to peruse the detail below, in particular the first two items which compare the situation in the United States to the legislation and regulation that occurred in Australia regarding interchange. Why is that? Empirical analysis and comparison to a similar situation is always important. It may, or may not, be the driving force in your decision making process but it must be considered.

Analysis of Australian legislation:

The actual detail of the legislation:

Other sources of information**:

What’s your perspective? Agree? Disagree? Anything to add? Critiques? The comment form is below…

* a topic for a whole other book…or perhaps talk over beverages of the adult variety
** by no means holistic

July 18, 2009

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