Friday, June 03, 2005

The Problem of Interchange Fees: Costs Without Benefits?

The Problem of Interchange Fees: Costs Without Benefits? (By: David Balto 2000 - Robbins, Kaplan, Miller & Ciresi)

Consumers are well aware of many payment systems costs, such as annual fees for credit cards, current account overdraft fees, late payment fees, and ATM fees. Far less transparent are "interchange fees"—the fees that banks pay one another for each credit card, debit card and ATM transaction made by their customers. Interchange fees have existed for over a quarter of a century, so some might assume they are a necessary fact of life. But they have increased significantly over the past few years, and thus disputes and controversies between merchants and banks over the fees are intensifying.

In the United States a group of merchants have sued Visa and Mastercard seeking over $8 billion in damages for supra-competitive interchange fees.1 Just last month, in a report to the Chancellor of the Exchequer, a U.K. study on banking services called for substantial reform of the use of interchange fees.2 In Australia, the Competition Commission is studying the role of interchange fees.3 In the United States alone inter-change fees amount to billions of dollars each year, so the resolution of these disputes can have a tremendous impact on the fee income earned by banks and other financial institutions and ultimately on the efficiency of the payment system.