Sunday, December 11, 2005

Interchange Fees Were Designed to Hedge Against Fraud (

A lead argument by Visa and MasterCard for forcing merchant interchange fees was to cover their exposure to fraud. Although the fraud costs are a faction of the total take from the $25 billion annual interchange charge.

Interchange fees are meant to cover the cost of processing a credit-card transaction and the risk taken by the issuing bank that the credit will not be repaid. If the fraud costs were a real issue certainly, the banks would not want back its riskiest former customers.

Now, the banks are issuing a record number of credit card solicitations to the 2 million Americans who filed for bankruptcy in 2005. The New York Times (Dec 11) reports that the newest target for issuing solicitations are those with the most risk.

In May, The Merchants Payment coalition explained that: "Banks say they charge interchange to make up for bad debt or fraud. With fraud costs consistently decreasing in recent years, however, the costs interchange is intended to cover aren't nearly as much as the amount charged, and banks already make huge profits from cardholder interest and fees. Moreover, the coalition believes that much of the fraud that interchange is intended to cover is the fault of banks' poorly designed card programs, not the fault of merchants."

Only 1 in 2000 of the banks mail solicitation lead to signing up just one new cardholder. Credit card companies mail out 5.24 billion mail solicitation each year yet only 4-10ths of 1% reply. This means 5 billion pieces of mail are garbage. What other industry has such huge profits that they can afford to throw away 5 billion pieces of junk mail every year?

An earlier posting compared the banks to drug dealers. Can you imaging the outrage if a drug supplier or legal pharmaceutical company launched a marketing campaign to former addicts?