Tuesday, March 15, 2011

Financial Institutions versus Retailers

Previous posts have discussed the ongoing feud between financial institutions and retailers over the issue of interchange fees. An interchange fee is a fee paid by merchants when they accept a debit or credit card for payment of a purchase. The merchants now pay a percentage between 1 and 2 percent of the transaction amount depending upon the product or service. The Federal Reserve is now proposing to set a flat rate of $0.12 per transaction on all debit and credit card transactions.

The retailers say that they will pass along the savings from the reduced interchange rates back to the consumers through lower prices of their products and services. This may or may not occur in the short term following the pricing change, but will the savings still be there 5 years down the road when no one is talking about interchange rates anymore?

Institutions will lose revenue if this Federal Reserve proposal is implemented. There is no doubt about that. Our existing card program costs (that were not considered by the Federal Reserve) such as fraud, personnel, data processing, licensing fees, compliance, and 24-hour monitoring will still be there. Additional fees would have to be implemented on checking accounts and credit cards to make up the lost revenue.

Credit unions are urging Congress to step back and conduct a compete analysis of all costs associated with maintaining a debit and credit card program. There should be an economic impact review of this Federal Reserve proposal. It may be time for changes in the interchange fee structure, but the process used to calculate the proposed $0.12 flat rate is flawed and will cause more harm than good to consumers.

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