Shoveling Out From The Interchange Snowjob

If one of those big, bad companies (oh, for kicks, let’s just say it was a bank, our punching bag du jour) tried to mislead the public, what would the response be? Outrage. People would be up in arms, and politicians — especially the current administration — would be calling for legislation to punish the offender, and prevent it from happening again.

And, of course, our elected public officials would make a public spectacle out of it. Might even warrant dropping a few F-bombs, eh Carl Levin?

But what happens when those same elected officials, or some other politically-motivated individual, spews misleading information? Not only do they get a pass, but they get a platform to deliver those messages in publications like the New York Times and Huffington Post.

Examples: In a HuffPo article from February, California state assembly member Pedro Nava wrote:

On average, consumers pay $427 annually on interchange fees without even realizing it.”

Unfortunately, that’s simply not true, at least not literally. Consumers don’t pay an interchange fee. Merchants do. Whether or not that cost gets passed on to consumers is a different question of course, but if he’s going to expand the analysis to every cost a merchant incurs that works its way back to consumers, maybe Nava should start with the 8.25% sales tax that Californians pay.

More recently, the NY Times published an article written by Albert Foer, the president of the American Antitrust Institute, who wrote:

If the United States were to reduce the interchange rate from 2.0 percent to 0.5 percent, the savings would be $36 billion per year.”

That’s a true statement, kind of. $36 billion would be saved, but it’s really not clear who would reap those savings. With retailers’ profit levels declining, do you really think the savings they would accrue in interchange fees would be passed on to consumers? It’s possible. Just not on this planet.

The other fallacy in Foer’s analysis is that when companies are faced with revenue decline, most don’t sit back and do nothing. They try to find ways to recoup those shortfalls. This involves trying to find new customers, and/or offering new products, but may involve raising prices and fees in other areas. So, in the long run, those savings never materialize.

I’ll repeat that: Those savings never materialize.

If the same elected officials who are spewing falsehoods continue to (or try to) regulate firms’ ability to price their products and services, the outcome may be lower prices, but with a cost: Lower employment levels. As a firm’s revenue declines, so does its employment count.

But I should stop this rant — I’m probably preaching to the choir. If you’re reading this, you likely work in the financial services industry for a bank or credit union and agree with me.

The question that needs to be addressed: What should FIs do about this?

If there ever was a good opportunity for a national education/advertising campaign, this is it.

Callahan & Associates recently alerted credit unions to the potential impact of a cut in interchange fees:

If credit union’s interchange income was reduced in total by 75 percent (from Foer’s stated 2.0 to 0.5 percent), the lost revenue would drastically affect credit union non-interest income and the eventual value returned to members. Do your members know how interchange helps the credit union and subsidizes the true cost of providing debit and credit services?”

This is too narrow a view, though. The impact to credit union members is much broader than just the impact on their CU’s payout.

FIs — banks and CUs —  need to educate the public about what the interchange fee is. What it’s there for, who pays it, and how it helps pay for the rewards that consumers get on their credit and debit cards, and how it helps (will increasingly help) to keep checking account fees low, if not free. And how it’s a fee that merchants pay because it enables merchants to reduce the amount of cash they handle, reduces their billing costs, and helps prevent fraudulent activity.

As a VP of operations at a credit union was quoted as saying in American Banker “the current fee system puts financial institutions of all sizes on the same playing field in setting interchange rates. It allows the credit unions to compete with the largest national banks.”

This may cause a bit of a quandary for credit unions, however. After spending so much time and effort over the past 18 months distancing themselves from the larger institutions, I can’t help but wonder if this will cause some PR embarrassment for credit unions.

It doesn’t matter, though. This issue is too important.

5 thoughts on “Shoveling Out From The Interchange Snowjob

  1. Pingback: Tweets that mention New blog post: Shoveling Out From The Interchange Snowjob Thx in advance for reading and RTing --

  2. Ron,

    Part of the danger of fanning the anti-bank fire is that ALL institutions will reap the “rewards” of the regulation that will Washington will impose.

    You’ve said it before and it is worth repeating that credit unions would do well to focus on marketing the merits of their products & services rather than bashing banks. In the long run, no good will come from derogatory advertising on the parts of credit unions. Marketing like this offers no value


  3. Jason: I had seen that YouTube video a couple of weeks back when it came out. I decided not to comment on it, because — believe it or not — I do try to pick my fights, and thought it wasn’t the best use of time and effort to harp on one CU’s ad approach.

    But I really hope other people respond to your comment about it “offering no value”. [I can see it now, someone, defending the ad, will point to the 2,000+ views the clip has had, and that generating 2k impressions thru traditional media would have been 10x more expensive, and so no — and completely miss your point].

  4. Ron,

    I think you put interchange in a good context here and to take it a step further, do merchants realize the benefits they get from accepting credit cards? How quickly they seem to forget that customers spend more with cards and the merchants get funded faster. That service has a price/cost.

    I could not agree with you more that merchants most likely would not pass along those “savings” if interchange were lowered.


  5. Joe: The vast majority of merchants know very well the benefits they get from cards — not just credit, but debit as well. They’re just capitalizing on political expediency by going after the FIs and networks and propagating a campaign to sway public opinion. To make myself very clear: I don’t begrudge them that, at all. I would do the same, in the same situation. My anger is directed more towards the mouthpieces — HuffPo and NY Times — that pass on this misleading info without fact checking or making even the slightest attempt at providing a balanced story.

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