The current public policy rage about payments is all about congressional motion toward issuing legislation to create a governmental entity to monitor and manage interchange fees. My first thought is yet another governmental watchdog is the absolute last thing we need. My second thought is, something needs to be done to move the majority of the costs of using credit cards to the banks that issue them and the cardholders that use them. Oh, what a surprise that those who unilaterally decided the retailers would bear the cost burden are now portraying themselves as innocent victims!
The current system puts all the expense of using credit cards on the retailer with no say in what they are or how they are applied. They have a just cause in being up in arms about the situation. Who deemed them the fall guys in this situation? Whatever incremental sales benefit the retailer received in the early days of credit cards when Visa was BankAmericard was always suspect and have long since evaporated.
In the current system, there is no doubt that issuing or using credit cards are not influenced in the least by interchange fees. Issuers change what they want and buyers shoulder none of the costs. There is no pain on the part of the issuer to NOT promote more and more rewards forms and there is no initial purchase cost to the cardholder to use their cards exclusively instead of cash or debit.
It is interesting to see the statements by the card associations where they say fees average 1.6%, when a quick read-through of the public information they provide on interchange fees reflect that is logically impossible. A fee of 1.6% is essentially the lowest fees shown on the rate charts and that rate is only for very basic cards presented for authorization using a very tight set of requirements. For everything else, the fees go up and up, to around 3%.
So, what is the solution? Actually, it is quite simple in concept, albeit a bit more complicated to implement. All that has to be done is change the credit payment system to remove the burden from the retailer and place it where it belongs, on the issuer and the cardholder. Just borrow from the debit model the processing fee pass through amount flows and apply a similar model to credit card transactions.
First, remove any and all restrictions in any agreements to allow the retailer, at its discretion, to pass on some or all the interchange fee to the cardholder or to charge a credit card fee if it wishes. Second, to facilitate this action, the authorizer could be required to supply the interchange fee in the authorization response. Until that fee pass thru is available the retailer could approximate the fee based on transaction history.
Now, the retailer can decide to tack some or all the interchange costs to a credit transaction just as they do for ATM transactions. If you make a $100 purchase, you could get charged $102.43. If the consumer wants the convenience of credit, then they can pay for it. If not, they can use cash or debit. If the retailer wants a competitive edge; they can pay for some or all the interchange fee. If the bank wants the consumer to use credit, they can reduce the interchange fee.
With this approach, the retailers no longer have a complaint about interchange fees because the may pass them through to the cardholder. And, the consumer can decide if they want to pay a convenience fee for their credit purchases or not. The most likely outcome of this approach is consumers will demand lower interchange fees from their card issuer. And the issuers will have a choice of lowering fees or losing customers to debit. So the fight against interchange fees moves to the segment holding all the cards and all the clout.
Best of all, we keep the government, in its infinite wisdom, from destroying up yet another piece of the economy.