Franchisors and franchisees who accept credit or debit cards as payment from consumers are familiar with--and likely disdainful of--the fees that card issuers and banks charge for those transactions. The largest component of these fees are called "interchange fees," which are fees that card-issuing banks charge to a merchant or retailer's bank in exchange for processing the transaction. Interchange fees (along with other small fees) are then passed along to the retailer or merchant. In this way, interchange fees affect the prices that many businesses charge to consumers for goods and services.
Credit card networks set interchange fee amounts, but these fees can vary depending upon the type of card, the size of the business (larger companies are often able to negotiate lower rates), the type of transaction, and even the location of the business. Interchange fees on debit cards tend to range lower (1 percent to 2 percent of the value of a transaction) than interchange fees on credit cards (which can be up to 3 percent of the transaction value).
Interchange fees thus have an impact on a business's bottom line. According to the National Association for Convenience Stores, convenience stores in the U.S. had lower profits ($5.2 billion) in 2008 than the amount they paid card issuers ($8.4 billion) for processing transactions (www.nacsonline.com/nacs/government/creditcardfees/pages/default.aspx). Ironically, interchange fees have increased significantly over the past 10 years, while at the same time technological advances have brought down the real cost of processing transactions. Retailers, merchants, and consumers have become more vocal about the need for interchange fee reform. And the government has taken notice.
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act). One component of the Act is interchange fee reform. Specifically, debit card issuers with more than $10 billion in assets may now only assess interchange fees that are "reasonable and proportional to the actual cost" of processing the transaction. The Federal Reserve Board was granted nine months to write final rules to establish standards for determining what constitutes "reasonable and proportional." Under the Act, businesses also may establish a minimum purchase level of up to $10 for accepting credit cards. (In the past, businesses were not permitted to do so.) On the other hand, the Act permits merchants to offer customers discounts for paying in cash, by check, or by debit card.
Congress wasn't alone in taking action against interchange fees. In October, the U.S. Department of Justice (DOJ) filed a civil antitrust lawsuit against American Express, MasterCard, and Visa. DOJ alleged that these companies' policies prevent businesses from offering consumers discounts, rewards, and information about card costs, which ultimately results in consumers paying more for purchases. Connecticut, Iowa, Maryland, Michigan, Missouri, Ohio, and Texas joined the DOJ in the lawsuit.
Visa and MasterCard settled immediately. Under the settlement terms, businesses can inform consumers about the costs imposed by a particular card network and can steer customers to credit cards with less-expensive interchange fees (e.g., Diners Club instead of American Express). In this manner, the settlement allows businesses to promote, express a preference for, and offer discounts or rebates for using a particular card. Businesses can even offer a discount or rebate for using a less-expensive credit card within the same network, such as for using a card that does not offer rewards versus one that does.
American Express has not yet settled and plans to fight the lawsuit, contending that the proposed remedy gives its competitors an advantage. As a result, businesses that accept only MasterCard and Visa are permitted to embrace the settlement immediately, whereas businesses that accept American Express as well must wait for the outcome of the lawsuit.
The interchange fee market repercussions of the Act and the DOJ lawsuit remain to be seen. But merchants and retailers can ultimately expect to see a lowering of debit card fees and perhaps a widening of the gap between debit- and credit-card fees. Card preferences and comparisons may become more pronounced online, where businesses have a greater opportunity to present payment options, and where consumers have more time and information to consider those options. The Act and results of the DOJ lawsuit will certainly educate consumers on the cost of using different cards and are sure to have an effect on everyone's bottom line.
Michael Laidhold is a partner with Plave Koch PLC in Reston, Va., and has represented franchisors in domestic and international transactional and regulatory matters since 2000. Contact him at email@example.com or 703-774-1206.