David Vs Goliath?: The Global Arguments Over Interchange Fees

With 69% of Britons preferring to use plastic rather than cash, a whopping 3 million of them juggling 5 or more credit cards, and someone every two seconds switching credit cards in order to take advantage of introductory 0% interest balance transfer offers, the credit card business is bigger than ever.

However, despite a somewhat fashionable status among individual consumers, who watch and wait for the best credit rates and credit card fees (people nicknamed Rate Tarts!), there is growing unrest between credit card companies and the other key player in the money market: the retailers.

In both America and Europe, retailers complain that credit card companies Visa and MasterCard, who together control around 75% of the credit and debit market, are charging them too much for accepting their cards in their stores. In the States, card companies charge retailers around 2%, which means for every dollar spent on a card in a retailer outlet, 2 cents goes to the card companies – helping them bring in $35 billion a year in fee charges. In Europe meanwhile, the European Commission last December ruled that MasterCard’s interchange fee network within the European Economic Area was charging illegal amounts to retailers – and is currently investigating Visa as well.

What seems like a clear-cut case of David versus Goliath is, however, much more complicated than it appears. A ruling at an antitrust case in the US, where a merchant was complaining over high interchange fees, stated that: «The [bank] consortiums indirectly establish the merchant discount fee, much as the cost of eggs sets a floor price of an omelette on a menu. Just like the restaurateur, the banks charge the merchant a higher price than their cost of business to make a profit. This behaviour suggests a rational business decision, not a conspiracy.»

What this statement suggests (quite rightly) is that the prices set by the companies providing consumers with credit cards reflect not only a need to turn a profit that any businessperson must be able to identify with, but also that the credit card companies provide retailers with a better structured and reliable payment system; a network that, through years of development, allows retailers to reach more consumers and thus bring in more profit.

Retailers also have options to avoid the fees, by offering discounts on purchases made with cash, and bigger chains can also offer their own cards as an alternative to MasterCard or Visa, while the biggest retail chains can afford to negotiate with the credit companies.

This ongoing dispute between the ‘David’ retailers and ‘Goliath’ credit card companies may seem like a typical example of the ancient tale, but things are clearly not that black and white. Just imagine if at the start of the David and Goliath story we heard that Goliath had spent years developing a workout program that lent him his great height and strength – only to be slain by an only slightly smaller David who came looking for a fight!

Disclaimer:
This article has been written for information and interest purposes only. The information contained within this article is the opinion of the author only, and should not be construed as advice or used to make financial decisions. Expert financial advice should always be sought and any links contained within this article are included for information purposes only.