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Interchange Updates: Canada, EU, and the US

posted by Adam Levitin

All's Quiet on the American Front in the interchange wars.  But there has been some action to report in Canada and the EU. In Canada, the federal Competition Tribunal dismissed the suit brought by the Canadian antitrust authority against Visa and MasterCard. Only a summary of the decision is available--the ruling is under seal.  According to the official summary, the dismissal was on the grounds that the statutory provision in question required a resale, which had not been established by the Commissioner of Competition.

But the Competition Tribunal went on to explain that in the event it was wrong about its statutory analysis, "there had been an adverse effect on competition" from no-surcharge rules. (My emphasis.) Nonetheless, the Competition Tribunal found that the proper solution to the antitrust problem is a regulatory framework, not an injunction.

So while this was a victory for MasterCard and Visa, it was a victory on technical grounds. The Canadian Competition Tribunal was clear that no-surcharge rules are anti-competitive. It'll be interesting to see if Canadian regulators or Parliament take up the implicit invitation to create a regulatory framework as we did for debit cards with the Durbin Amendment. 

That brings us to the EU. The EU Commission proposed just such a regulatory framework, with fee caps on both debit and credit interchange fees. I have no idea whether this proposal will actually become law in the EU.  

And finally there is one small item cooking on the domestic front. There's a suit pending in federal district court in the Southern District of New York challenging the New York no-surcharge statute on First Amendment grounds. The argument is that a surcharge and a discount are mathematically interchangeable, but New York by permitting discounts, but not surcharges is regulating merchants' speech. To my disappointment, the New York Attorney General has decided to defend the statute. 

The New York suit was brought by public interest lawyer Deepak Gupta, and consumer groups have weighed in with supportive amicus briefs. Slowly, but surely US consumer groups seem to be understanding that interchange fees are really a hidden tax on consumers. While reducing interchange fees may result in banks trying to raise other fees, if those other fees are more transparent, the total paid by consumers should be lower. Indeed, that seems to be exactly what happened when BoA tried to raise checking account fees after the Durbin Amendment. The checking account fees were more transparent, and BoA lost a lot of accounts to credit unions and community banks. 

Which brings us back to Canada. Apparently the Canadian consumer groups haven't gotten the memo. Brian Cran, head of the Consumers' Association of Canada responded to the Canadian interchange ruling by saying:

I’m ecstatic. We get to keep our credit cards the way they are. We keep our reward cards. We keep our extended warranties. We keep our delivery guarantees. We keep our fraud guarantees.

Apparently, Mr. Cran doesn't understand that none of these things are free. Canadian consumers are already paying for them, but because they are being charged indirectly, these charges are surely inflated because there is no competitive pressure pushing them down.

As it is, all of these wonderful features that Mr. Cran wants preserved are really bad deals for consumers:

  • The cost of operating rewards programs is at most 45% of interchange fees, and the actual rewards received are of less value. And for many cards, even premium cards, the rewards value is an even smaller percentage of interchange. One very large US prime portfolio I've seen was at about 20%. 
  • I don't know how many people actually use credit card extended warranties, but I suspect it is very few. I also suspect that almost nobody would purchase this sort of insurance as a free-standing product. 
  • I'm not sure what Mr. Cran means by delivery guarantee--perhaps that if you don't get the goods, you get a refund? I assume that's a function of Canadian law, not card network rules. 
  • Finally, fraud guarantees are of little value:  Canadian law, like US law, caps liability at $50 on credit cards. The zero liability policies of the major card networks don't really add much because issuers aren't likely to litigate with a consumer over $50 or shut an account over a single dispute, and the policies may not be enforceable anyhow because of a lack of contractual privity. 

Hopefully the Canadian consumer groups will talk to their American counterparts a bit about what US consumer groups (and I'm not talking about the astroturf groups the card industry has created) have learned about interchange over the past decade.


Sorry,... You are just wrong. Interchange fees like returns and shrinkage (shoplifting and so forth) detract from profits,.. They have essentially zero effect on pricing.

I have spent enough time in retail including having my own store and paying them myself,.. to know this is a rediculous fallacy drummed up by WalMart and other big retailers, in order to cut expenses. I am not supporting the banks necessarily,.. Just stating a fact,.. If interchange fees are lowered it will have zero effect on consumers.

Frankly,.. It seems like common sense.

Oh it is the same argument that retailers use when they claim high prices are caused by shoplifting,.. Which is equally untrue.

You can buy blue jeans anywhere from $10 to well over $200,.. Are the $200 jeans that much higher due to shoplifting or interchange fees?


Are the T-shirts on the half price rack because there was less shoplifting that month?


Retailers are not forced to accept credit cards,.. They do because the client base is worth having,.. And the credit assurance and convenience it confers are worth the fees. That said, Visa and Master Card may well be a cartel,.. And the fees too high.

That is a very different question,.. And I grant you,.. One worth asking.

Let's just ask it for the right reasons.

Let's see. If the cost of gas goes up, we expect to see price increases in retail goods that have to be shipped by truck. No one doubts that the price of gas affects retail prices. There's no reason the same thing wouldn't occur if the price of accepting payment rose. It has nothing to do with price differentials among different goods of the same kind, such as jeans. Instead, it goes to the baseline price for all jeans, as does shoplifting (a/k/a shrinkage). There's a reason that it's impossible to buy kids' toys now that don't take 10 minutes to open in order to get past all of the anti-shopping-lifting packaging. Someone's paying for that, and I'm guessing it's the consumer.

Retailers aren't forced with a gun to accept cards, but try being a competitive retailer that doesn't accept cards. There are very few and none of any size. In part this is because retailers like cards--there are lots of benefits to retailers from card payments, none of which should be gainsaid. But the issue has never been cards vs. no cards. Instead, it is about pricing of the cards themselves, and particularly, the pricing of rewards cards, which cost retailers more, yet do not generate any additional benefits for retailers unless they are the rewards provider.

Adam,.. I'm sorry I really and truly do not buy into your premise,.. Maybe in the case of extremely fast moving prices like gasoline,.. But elsewhere no,..

The reality is, it has been proven that,.. for example coffee,... Which is a commodity which in some instances will shoot up in price wholesale, and so it goes up at retail.

It never goes down at retail,.. Or at least not commensurately, even though it went back down at wholesale.

Credit cards started with cards like "Diner's Club",... And just as you say these rewards cards are for all practical purposes the same thing,.. Aggregated buyers that confer deals to customers. I don't even use those cards,.. Personally,.. But I don't feel cheated when others do.

I don't use Groupon either,.. But it is essentially the same concept,.. Though I would argue that for most retailers to do something with Groupon is nuts. There may be special cases where it makes business sense,.. But mostly not.

Not accepting credit cards is equally nuts,.. But people still do it.

My perspective is that credit cards are access to buying power,.. At the time I had a store fees for American Express were over double Visa and MasterCard,.. But that relatively rare customer was easily worth the fee discrepancy,.. So it still made business sense to offer it,.. And it had zero influence on pricing.

It is more like location than shipping costs in any event,.. But even still,.. How many companies choose a retail location based on shipping costs? Amazon maybe for warehouses but brick and mortar? No. You pick the location where you think there will be buying going on,.. That means Manhattan is probably better than Poughkeepsie in most cases even though the lease is over ten times as much.

Beverly Hills is better than Fresno. San Francisco is better than Manteca.

Credit cards,.. For better or worse,.. Represent a huge amount of buying power.

That buying power,.. By your own admission,.. Is given to the card users in a variety of ways,.. Convenience,.. Airline miles,.. Rewards and discounts, all of which are at least nominally customer benefits,.. Even though the fees might be onerous to the retailer.

There is a reason that real estate in Beverly Hills is expensive,... Access to the customer base. Credit cards are the same. You want that customer base.

Now sure,.. Prices are high in Beverly Hills,.. But it isn't because the real estate is high. A McDonalds in Manhattan doesn't charge more than Small Town USA because lease rates are lower in the small town,... They charge the same and the one in Manhattan probably still makes more money,.. A whole lot more,.. Because they are always busy.

The important thing in retail is selling stuff,.. And credit cards make that very easy.

The credit card industry will probably be disrupted,.. by cell phones,.. I doubt retailers will like it any better,... Starbucks made a deal with Square,.. So at least they are embracing the inevitable.

Convenience with trust is liquidity,.. The more convenient and trustworthy transactions can occur, the more likely that transactions will occur.

Cell phone payments will explode if and when a provider of some sort,.. can increase both trust and convenience,... someone will get paid for supplying that trust and convenience,.. And the customer base,.. Not to mention demographics.

Credit cards work very well,.. NFC alone,.. Is no better,.. Hence no uptake.


We aren't being wiped out getting nickel and dimed by transaction fees,.. More like MF Global and AIG.

Destroy trust and you will ultimately destroy commerce.

Credit cards supply greater trust than cash... the retailer pays for that,.. and frankly, it is a good deal.

One more thing about trust in commerce,.. And the value of that. Over twenty years ago I worked for Nordstrom,.. And I got in this big argument with my Dad,.. Because his contention was that the lenient return policy that Nordstrom has makes their prices higher. It is essentially the same argument that you are making,.. But it is wrong. Nordstrom already had high prices,.. The return policy is lenient to keep their customer base happy and growing. It is a cost of doing business the way they do for their demanding customer base and it is a competitive advantage for one simple reason.

Their customers expect it.

They know they will be made happy.

Nordstrom won't be undersold on any specific item,.. They'll do price wars and they do.

So their prices aren't being increased because of the policy,.. They are high because of the product mix and the customer base.

The lenient return policy is all about maintaining trust.

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