Shedding Light on Real Cost of Payments

The last month has seen a major court decision about interchange fees in the UK, a European Union (EU) review of its interchange cap regulation, a Reserve Bank of Australia bank fee report and a US retail report on card costs. The cost of interchange fees is clear in the EU and its regulation is clearly working as intended. The situation in the US reveals that interchange fees are only one part of the card cost structure, other fees and charges are significant. The true cost of Reward points, shared by consumers and retailers, is highlighted by the RBA. Given the now significant importance of Reward points, this is a timely insight into their real cost.

Situation in the US In the US, the National Association of Convenience Suppliers’ (NACS) ‘State of the Industry’ report says that in 2019 convenience retailers paid $11.8 billion in card and swipe fees and in reward point costs. All merchants across the US paid VISA and Mastercard interchange fees worth $53.6 billion in 2019. According to a Nilson report, this is more than double the 2012 figure. There are, perhaps, two reasons for this level of increase. Firstly between 2012 and 2018, Federal Reserve figures show that credit card usage increased by 67%. Secondly, the use of what are known as Reward Points has increased significantly. Reward points are benefits consumers receive related to their level of expenditure on a card. Card companies charge higher fees to pay for these rewards (see below – ‘Bank Fees in Australia’). Interest rates charges on credit since 2010 have not increased similarly across the board. People with the lowest credit rating have seen rates increase by 4.2% while those with the best credit ratings, by 1.3%. A Wall Street Journal article written at the time of the NACS report suggested that since card payments cost NAC members less than card payments, effectively every cash payment subsidises those who pay with cards. A Federal Reserve Bank of Boston report from 2010 put a figure on the size of that subsidy, cash households pay $149 to use cash and card households receive a benefit worth $1,133. 63 merchants in the US, including Amazon and Starbucks, are currently suing VISA, Mastercard and card-issuing banks, claiming they collude to avoid competing over interchange fees. A key complaint is that the merchants are required to accept all cards issued by VISA and Mastercard, they must ‘honour all cards’. The problem is that swipe (interchange) fees vary between different card types. The merchants want to be able to choose which cards to accept and to be able to negotiate swipe fees individually with the banks. The banks argue that the fees are justified because they cover the cost of crime, innovation, reissuing cards with updated features and their losses on unpaid bills. They also point out that card payments mean that the retailer avoid cash related costs. New fees were about to be introduced when the pandemic struck, but they have been put off until 2021. Since 2011 the US has had a cap on debt card interchange fees. These are currently 22 cents per transaction and 0.5% of the transaction value. There is no cap on credit cards and a 2-3% fee on transaction values is common. Interchange fees in EU The European Commission has reviewed the regulations brought in on 7 February 2018 reducing and capping fees charged to merchants for card payments. Its report estimated that savings of €2 billion pa were being made (a range of €864 million to €1.93 billion was quoted) and that cross border acquiring had increased. The regulation included card schemes and entities processing card transactions. It prohibited territorial restrictions for the use of cards and the prevention of choice of payment brands and payment applications. The objectives of the regulation were the creation of a single market for card payments and the prevention of competitive restrictions, including the ability for merchants to negotiate fees below the interchange rate. It is little wonder that this report has been widely quoted in the US. UK merchants win with the EU anti-trust regulations A class action was brought by merchants in the UK against VISA and Mastercard, claiming that multi-lateral interchange fees infringe the EU’s anti-trust rules against restricting competition in the acquiring market. It was argued that VISA and Mastercard’s collective agreement to set the multi-lateral interchange fee effectively fixed a minimum price floor which limited competition. This has been a long standing case, and in June the top UK court found in favour of the merchants. All grounds of appeal were dismissed except over the degree of precision required to calculate loss, the so-called broad axe issue. 50 merchants are currently quantifying and progressing their claims. Again, this decision has been reported extensively in the US. Bank fees in Australia The Reserve Bank of Australia issued a report in June looking at bank fees. The authors reviewed 15 financial institutions representing 90% of the banking sector by balance sheet value. Annual fees on cards that do not earn Reward points were $54, down 1.2% in 2019 compared with 2018. In contrast annual fees for Reward cards were $211, up 3.8% in 2019. Mid-2018 a number of major financial institutions started what is known as least cost routing, which is where a merchant can direct contactless debit card transactions to the network with the lowest costs.