The Wall Street Journal keeps the spotlight on banking industry rent-seeking, looking at the increased pressure it finds itself under on interchange fees, the 2 percent it reaps off every swipe of plastic.
The press has aimed what’s left of its cannons at the $30 billion (okay, $27 billion) scourge of overdraft fees, with success. It’s also touched on the interchange issue, which is even bigger: $45.3 billion a year in fees to U.S. banks in recessionary 2008. That’s up a lot over five years:
Overall merchant fees, including other revenue collected by banks and processing middlemen, are up 78% from $25.5 billion in 2003
Retailers, of course, don’t just eat all those costs. They, as much as they can, pass them on to consumers one way or another. As The New York Times Floyd Norris pointed out a couple of weeks ago, that means cash users, who tend to be poorer, are subsidizing plastic users, who tend to be better off. And these are hidden costs: Consumers don’t see them at the point of sale and many or most don’t know they exist.
But every time you use a card rather than cash, an average 1.82 percent of whatever you paid goes to the banks, the Journal reports. Retailing is already a very low-margin business. Think about that the next time you go to check out at your favorite local restaurant or mom-and-pop bookstore—and know that if you use that rewards credit-card, the interchange fee is even higher than on a regular credit card. And if you haven’t figured out why lots of stores have minimums to use plastic:
Interchange fees typically include a flat transaction charge plus a percentage of each purchase, varying by the type of merchant and card.
Clearly, banks and Visa and Mastercard deserve money for the service of convenience they’re providing. The key question is how much it costs them to do so and how much they should be able to charge for it. This seems like a good line of inquiry for the press.
And if that 1.82 percent doesn’t seem like much on your $11.84 convenience-store purchase, think about it more broadly—as a racket where two points are skimmed off half of all transactions.
This doesn’t mean regulation has to come from on high with a maximum percentage that can be charged. It does mean that regulators could force the interchange fee to be added on to the bill for those who choose to use plastic.
Meaning, if you pay with cash, you get a 2 percent discount on every purchase. If you’re a good consumer and shop mom-and-pop as much as you can, you’ll save even more because they get hit harder by banks because they have less power to negotiate than Mega Lo Mart does.
If you use a debit card, your add-on fee would be less than if you use a credit card. This would have the happy social side benefits of discouraging credit-card use and (depending on your sensibility) lowering bank profits.
There’s not much new here from the Journal, but it does give a head’s up that potential changes are being discussed at the national level:
At a House Financial Services Committee hearing earlier this month, some lawmakers expressed interest in potential rules on interchange fees; various bills that would set or change limits have been proposed. The Government Accountability Office, the investigative arm of Congress, is expected to release a report on interchange fees next month.
There will be intense lobbying on this issue by the banks (not to mention the retailers) and the press should keep an eye on that.Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at email@example.com. Follow him on Twitter at @ryanchittum.