Interchange Fee Changes: What You Really Need to Know Now (MA, V, BAC, C, COF, TCB)

You most likely saw the carnage that came to MasterCard Incorporated (NYSE: MA) and Visa, Inc. (NYSE: V) today.  The markets were braced for more changes coming to the interchange fees, also called swipe fees, which get charged per transaction.  The problem is that the proposed fees to be charged are far less than even what was expected just yesterday.  Interchange fees are passed on to the merchant, which is therefore passed on to the consumer in higher prices on goods.  Many consider it close to free money for the banks.

The Federal Reserve agreed to advance a proposal today to prevent charging debit swipe fees to merchants with a cap of $0.12 per transaction.  Before you consider that the sky is falling, there is a public comment period.  That means that banks and lobbyists and others will get to speak about the pros AND the cons of this proposal.  That $0.12 cap is far less than what had been expected.  In short, rather than a 50% or 60% cut in interchange fees might now be a cut of 80% or even more.

Of two proposals, one would allow the card issuer (banks) to use a formula to determine the maximum fee based upon costs and processing fees.  A safe harbor standard would be set at $0.07 per transaction.  The alternative plan did not have a safe harbor of $0.07 but still capped out at $0.12.  The problem with thinking this will kill banks is that the banks would seem to be free to pass on other charges to card holders.

The cap, while harmful to the same institutions that the Fed has tried to save, is meant to prevent unreasonable interchange fees.  Many already argue that the fees are already too high.  The Fed has also proposed a review of the interchange fees each two years and those reviews would take actual costs into consideration.

The big consideration here at the retailer level is that this means more money to the merchants which may never at all be passed down to the consumer via lower prices.  That is very arguable, but that has to be a concern.

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