A Voluntary Agreement on Interchange Fees is the Best Solution: MasterCard
Posted October 21, 2014 in News
As the saying goes, there are always two sides to every story. Last week we wrote about how wrangling between MasterCard and Visa is delaying lower credit card interchange fees. While consumers and retailers both want lower interchange fees, the solution isn’t so cut-and-dry.
This week’s post is from the perspective of card associations. The president of MasterCard Canada, Betty K. DeVita, wrote an interesting piece for the Globe and Mail why a voluntary solution is the answer.
Who Benefits from Interchange Fees?
Retailers pay interchange fees between 1.5 per cent and 4 per cent of purchases, according to the government. So-called premium credit cards hit retailers with interchange fees up to 4 per cent. Most retailers increase their prices to compensate for interchange fees, leaving customers who pay by cash, debit and basic credit card subsidizing them.
Who benefits from these hefty interchange fees? Not the card associations like MasterCard, Visa and American Express. MasterCard and Visa don’t receive any revenue directly from interchange fees. But don’t think MasterCard and Visa are offering credit cards out of the kindness of their hearts – they earn a tidy profit by charging financial institutions fees for networks, transactions, and other services.
Although in most case the interchange fee is set by card associates, it’s the issuer that benefits. These fees act as a financial incentive for the cardholder bank to offer credit cards to consumers. It’s up to the issuer if they want to pocket the full interchange fee or share it with cardholders via rewards programs.
Regulation Could Hurt Consumers
The negotiations on interchange fees appears to have hit a standstill. While Canadian small-business associations view the negotiations as a “massively complicated affair,” MasterCard doesn’t share that same opinion.
While the parties disagree on a lot of things, one thing they agree on is the potential for Canada as a poster child for a voluntary roll-back on interchange fees. High interchange fees aren’t just a Canadian problem – countries around the world are dealing them.
The premise of reducing interchange fees is to benefit merchants feeling squeezed by high fees and consumers paying higher prices. MasterCard says countries that have turned to regulation have hurt consumers, merchants and the economy.
Places like Australia, the U.S. and the European Union have seen the regulation of interchange fees. Although interchange fees were lowered, it’s consumers who ended up getting hurt in the end by the “quagmire of unintended consequences.”
Not only did access to credit tighten, many consumers ended up paying surcharges at merchants. Instead of paying lower prices, merchants kept the savings in fees for themselves. On top of that, rewards programs that a lot of consumers hold near and dear were reduced or eliminated.
MasterCard Favours a Voluntary Solution
MasterCard favours a voluntary solution over government regulation. Much like the government, MasterCard finds itself stuck in the middle, trying to balance the interests of various stakeholders. While some would like to see interchange fees completely vanish, most understand they’re a vital part of providing consumers with top-notch service. The goal is to come up with a solution that is fair for everyone.
Ever since the financial crisis in 2008, small businesses have provided much of the job growth. If we’d like to that trend continue, it’s important to deliver the lower interchange fees consumers and small businesses have been asking for.
The Bottom Line
MasterCard brings up some good points, but it’s important to take its opinion with a grain of salt since they do have a vested interest. Regulation should be viewed as a last resort if the parties aren’t able to come to a fair agreement.
The government shouldn’t be viewed as a white knight here to save the day. The government doesn’t have a good history with regulation – just look at Canada’s telecommunications market, where government regulation has scared away foreign investors and lead to among the highest wireless rates worldwide for Canadians.
We don’t want the same for interchange fees. Hopefully cooler heads will prevail and an agreement can be reached that benefits everyone.
