Report: Australian Merchants Don’t Pass on Interchange Savings

Retailers who object to current levels of interchange fees on electronic transactions often argue the levy forces them to charge consumers more for goods in their stores, driving up prices and penalizing customers. But a recent report out of Australia undercuts that argument. It finds that prices did not decline when retailers' transaction costs were lowered in that country. The August issue of the Australian Financial Review quotes a report from the Australian Competition Tribunal that shows that retailers saved more than $400 million (Australian) annually in fee revenue after interchange rates there were cut, but there was no evidence that they passed any of the savings on to consumers. Instead, consumers saw higher card fees, a reduction in loyalty benefits, and the introduction of surcharges of up to 3% on credit card transactions, the report found. Additionally, the report shows that many card issuers switched from Visa and MasterCard to American Express and Diners Club, where they could continue to get higher revenues. Arguing that interchange should be tied to the efficiencies brought on by electronic transaction processing, the Reserve Bank of Australia last year forced Visa and MasterCard to cut interchange rates by half to an average of 0.55% of sales. Kenneth Posner, an analyst at Morgan Stanley, has estimated that similar logic, if applied by courts or regulators in the U.S., would chop interchange from an average of 1.5% to 0.5%, costing issuers some $13 billion in income. Interchange, the fees card issuers receive from merchant acquirers in the Visa and MasterCard networks, is passed on to merchants and constitutes the largest portion of the discount rate they pay on each transaction. The interchange pricing system is decades-old but has come under challenge lately from retailers upset about pricing levels. Several major retail chains have sued the card networks over interchange, alleging it represents price fixing. Rates on credit card payments increased earlier this year, and those on signature debit transactions are generally higher than after the reduction forced last year by the settlement of the Wal-Mart class action litigation.