Interchange Fair Payment for Value, Visa and Others Contend

Defenders of interchange for electronic credit and debit transactions argue merchants are losing sight of the value interchange pays for. The subject of interchange has become hotly contested in the wake of lawsuits by retailers challenging it or aspects of it, and following recent interchange hikes by the bank card networks for card payments. As the battle over the interchange pricing structure for electronic credit and debit payments rages, many merchants argue that the bank card networks' rates now far exceed the processing, funding, and credit underwriting costs issuers bear. They argue this is especially true with debit cards, where there is no question of funding or bad-debt expense. Small and mid-size grocers, indeed, complain that card-acceptance costs now equal their operating profits (Digital Transactions News, April 12). But defenders of the interchange structure argue merchants neglect the value interchange pays for, including guaranteed payment and blink-of-an-eye, reliable processing (interchange, set by Visa and MasterCard, is paid by merchants to their acquirers and ultimately goes to issuers). In a major story on the future of the interchange pricing model to be published in the September/October issue of Digital Transactions magazine, Visa executives argue retailers should pay for the total value they receive from a guaranteed payment and the fact that consumers with credit cards are likely to buy more goods than they can immediately afford, resulting in more money in the retailers' pocket. “Issuers have to bear the costs of product innovation, delivering the service, covering chargeback protections, providing incentives, guarding against fraud, and guaranteeing payment,” says Josh Floum, executive vice president and general counsel at the San Francisco-based payments network. He dismisses the charge that the card associations are using interchange to cover issuers' poor credit decisions. “Covering credit losses is a small component of the value we bring to our retail customers,” he says. “Retailers who focus only on credit loss are losing sight of the value that we bring to them in having an efficient, guaranteed payment that allows their customers to make purchases with an instant credit line. They forget that they typically get a ticket lift every time someone pays with a credit card.” In any case, some experts question the notion that interchange, as a pricing model, should be tightly linked to the costs of delivering credit and debit transaction services. After all, they say, sellers in other industries, such as food service and hospitality, aren't under any such burden. Here, the price is based on perceived value rather than the cost of raw goods. “I can't understand it when I hear retailers say that issuers should base interchange on their direct costs. That is an argument I would expect from Ralph Nader, not a businessman,” says David S. Evans, vice chairman of LECG Europe Consulting Co. and a well-known exponent of the interchange system. “Issuers should not have to justify their fees on their direct costs. When I go into a store to buy something, I don't expect the store owner to justify the price charged based on the cost of raw goods.” The ultimate test of interchange, Visa officials argue, is acceptance by the marketplace, and here the verdict is positive, with cards penetrating new markets like quick-serve outlets, utilities, and government agencies. “Interchange requires balancing the economic needs of the merchants and the issuers,” says Floum. “”If the balance was out of whack, we wouldn't be getting the growth we're seeing today in terms of new merchants that are accepting our cards.” Visa also pours cold water on the idea that interchange should be reduced, with consumers picking up more of the cost now shouldered by retailers. Visa argues that would be a big mistake. “It is not appropriate that merchants get a free ride,” says Floum. “Merchants have to consider the value that we bring to them. Furthermore, the cardholder already does pay through card fees and interest charges.” Possibly even more important, some argue, is that higher direct consumer fees could mean fewer consumers will apply for or use their cards. “If more of the costs were borne directly by the consumer, it would mean that consumers might use their cards less and then who would benefit?” asks Daniel Tarman, senior vice president with Visa.