The Decade’s 12 Greatest Developments in Payments: #11 How the World War on Interchange Fees Transformed the Card Industry

A global war on interchange fees raged during most of the decade and will continue into the next. We’ll have to wait until next decade to find out who wins the war. But the war itself has already led to massive ramifications for the card business around the globe.

Card systems have lost major battles in the Australia and Spain and have dropped fees dramatically. The European Commission forced Visa to drop its cross-border interchange fee earlier in the decade and has renewed its assault; meanwhile MasterCard is appealing a decision by the Commission that is interchange fees are unlawful. Many other countries have battles going at various stages as noted in the recent GAO Study. In the United States several million retailers have filed a mega antitrust case against MasterCard and Visa which will go through various rounds of decisions starting next year and Congress has multiple bills for reducing or regulating interchange fees.

Here’s why the interchange fee war is on my list of the most important developments for the first decade of the 21st century even though it hasn’t been concluded.

Exposed to antitrust legal risks from setting interchange fees for member banks MasterCard and Visa decided to give up having membership organizations and turned themselves into for-profits. Maybe this wasn’t the only reason to do this but it was a very important one and helped determine the structure of the new organizations. Changing MasterCard and Visa from bank-owned not-for-profit associations into public companies that need to feed the stock markets every quarter with growth and revenue has resulted in a huge transformation on the dynamics of the card business. More on that later.

The other consequence of the interchange fee war is that it has alerted issuers that one of their major revenue streams may be highly constricted in the years to come. Anyone who doesn’t eat risk for breakfast has been rethinking revenue models.

Even where regulators haven’t reduced interchange fees the threat of regulation and legislation has probably put downward pressure on interchange fees. No one wants to be a target for regulators if they can avoid it.

Reducing merchant charges will be a revolutionary development if it happens in the United States. Merchants have paid for a significant part of having card systems ever since general purpose cards were first introduced in 1950 in the U.S. The antitrust legality of interchange fees were first attacked in the 1980s. An appeals court found them legal in 1986 and the Supreme Court wasn’t interested in reviewing that decision so it stands as the law of the land.

This will all sort itself out in the next decade. In the end interchange fees may survive at perhaps reduced levels. The European Commission is already dealing with the conundrum that it wants a new system to challenge MasterCard and Visa (which are seen as “American”) but it has had trouble getting anyone motivated with low interchange fees. The merchants stand a good chance of losing the U.S. litigation or settling for something that doesn’t constrain the networks too much. Congress just might get the fact that they’ll be blamed for consumers paying higher fees if they whack interchange fees and that no consumer will believe that merchants are passing the cost savings of lower interchange fees on to them.

But even with that happy ending next decade the interchange fee war has changed the card industry forever.

David S. Evans bio

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David S. Evans bio