The (Non-)Impact Of The Interchange Amendment

Well, I didn’t think it would happen, but what do I know about Washington. They managed to pass an amendment regulating interchange fees.

A shining example of how low the financial literacy rate is in DC, the amendment instructs the Federal Reserve to regulate interchange fees and requires that the fees be reasonable and proportional to the costs of the issuer or the payment network.

To prove what a slippery political slope this amendment was, most senators uncharacteristically gave up their right to be heard on the amendment before its vote, leaving only Dick Durbin to tout it on the Senate floor.

But it passed, and that has led some observers to comment on what the impact of the amendment will be. A recent post on’s blog listed five potential impact points. Here’s the list with my take on them:

1. Happy shopkeepers. The blog post claims that both small and large retailers feel gouged by card issuers and networks and are happy about the amendment.

My take: The amendment means potentially happy shopkeepers. Potentially, because, in the short term there’s no guarantee of a rate decrease. Remember, the amendment instructs the Fed to establish a rate that is “reasonable and proportional to the costs of the issuer or payment network.” Do you know what those costs are? Neither do I. And I bet that the issuers and networks don’t know what those costs are either. The interchange rate is a fee for a bundle of services that the issuers and networks provide. Unwinding those costs will be messy, and it will be a while before new rates are established, unless all parties simply agree to bow to political pressures and compromise (or more accurately, capitulate).

2. Lower prices. According to the Mint blog “when flour gets cheaper, bread gets cheaper.”

My take: Ain’t gonna happen. Retailer profitability has been in the dumps, and they’re desperate to show increased profitability. If they really wanted to lower prices, they could find other ways to reduce their cost structure. The retailers decided to fight the interchange war, and scored a victory in one battle. ┬áBut this misses the even more important point on why prices ain’t coming down: As I said in the previous point, the fee represents a bundle of services — services like fraud detection/protection, risk management, money movement, etc. If the issuers/networks don’t get compensated for these services, they will stop providing them. And retailers/merchants will have to pay separate charges for those services. And those charges might turn out to exceed the current level of fees. ┬áConsumer prices aren’t coming down, folks.

3. More cash-only transactions. One of the things the amendment does is allow merchants to establish minimum charge amounts on card transactions, so they don’t end up paying outrageously priced fees for 50-cent transactions. Mint’s thinking is that retailers will jump on this, and set up minimum charge amounts (retailers who do this today violate their Visa/Mastercard agreements).

My take: Ain’t gonna happen. Two reasons driving my thinking here. First, retailers are loathe to force customers into payment options. Retailers know that customers have choices, and would rather pay a fee on a transaction than lose the transaction altogether. The other reason is that younger Gen Yers have no clue what cash is.

4. Fewer rewards. Mint’s logic on this is: “debit card reward programs, financed by interchange fees, have traditionally been less generous than those offered by credit cards, because banks collect lower interchange fees on debit transactions. If the Durbin amendment stays on the bill once it becomes law, these programs will probably be toast.”

My take: Sorry, I disagree again. Mint’s logic misses some critical points: That competition for checking relationships still goes on, and banks will compete for new accounts using rewards programs as a competitive lever. Why? Because consumers are conditioned to expect something in return for their business. And because even if the interchange fee ends up being lower, with the restrictions on overdraft fees, banks will turn to the interchange fee as a driver of revenue on checking accounts. In a shining example of strange bedfellows, it will actually end up being the merchants themselves who will end up providing much of the funding for rewards programs.

5. The end of the world.

My take: And you think I’m cranky?