Shoveling Out From The Interchange Snowjob

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If one of those big, bad companies (oh, for kicks, let’s just say it was a bank, our punching bag du jour) tried to mislead the public, what would the response be? Outrage. People would be up in arms, and politicians — especially the current administration — would be calling for legislation to punish the offender, and prevent it from happening again.

And, of course, our elected public officials would make a public spectacle out of it. Might even warrant dropping a few F-bombs, eh Carl Levin?

But what happens when those same elected officials, or some other politically-motivated individual, spews misleading information? Not only do they get a pass, but they get a platform to deliver those messages in publications like the New York Times and Huffington Post.

Examples: In a HuffPo article from February, California state assembly member Pedro Nava wrote:

On average, consumers pay $427 annually on interchange fees without even realizing it.”

Unfortunately, that’s simply not true, at least not literally. Consumers don’t pay an interchange fee. Merchants do. Whether or not that cost gets passed on to consumers is a different question of course, but if he’s going to expand the analysis to every cost a merchant incurs that works its way back to consumers, maybe Nava should start with the 8.25% sales tax that Californians pay.

More recently, the NY Times published an article written by Albert Foer, the president of the American Antitrust Institute, who wrote:

If the United States were to reduce the interchange rate from 2.0 percent to 0.5 percent, the savings would be $36 billion per year.”

That’s a true statement, kind of. $36 billion would be saved, but it’s really not clear who would reap those savings. With retailers’ profit levels declining, do you really think the savings they would accrue in interchange fees would be passed on to consumers? It’s possible. Just not on this planet.

The other fallacy in Foer’s analysis is that when companies are faced with revenue decline, most don’t sit back and do nothing. They try to find ways to recoup those shortfalls. This involves trying to find new customers, and/or offering new products, but may involve raising prices and fees in other areas. So, in the long run, those savings never materialize.

I’ll repeat that: Those savings never materialize.

If the same elected officials who are spewing falsehoods continue to (or try to) regulate firms’ ability to price their products and services, the outcome may be lower prices, but with a cost: Lower employment levels. As a firm’s revenue declines, so does its employment count.

But I should stop this rant — I’m probably preaching to the choir. If you’re reading this, you likely work in the financial services industry for a bank or credit union and agree with me.

The question that needs to be addressed: What should FIs do about this?

If there ever was a good opportunity for a national education/advertising campaign, this is it.

Callahan & Associates recently alerted credit unions to the potential impact of a cut in interchange fees:

If credit union’s interchange income was reduced in total by 75 percent (from Foer’s stated 2.0 to 0.5 percent), the lost revenue would drastically affect credit union non-interest income and the eventual value returned to members. Do your members know how interchange helps the credit union and subsidizes the true cost of providing debit and credit services?”

This is too narrow a view, though. The impact to credit union members is much broader than just the impact on their CU’s payout.

FIs — banks and CUs —  need to educate the public about what the interchange fee is. What it’s there for, who pays it, and how it helps pay for the rewards that consumers get on their credit and debit cards, and how it helps (will increasingly help) to keep checking account fees low, if not free. And how it’s a fee that merchants pay because it enables merchants to reduce the amount of cash they handle, reduces their billing costs, and helps prevent fraudulent activity.

As a VP of operations at a credit union was quoted as saying in American Banker “the current fee system puts financial institutions of all sizes on the same playing field in setting interchange rates. It allows the credit unions to compete with the largest national banks.”

This may cause a bit of a quandary for credit unions, however. After spending so much time and effort over the past 18 months distancing themselves from the larger institutions, I can’t help but wonder if this will cause some PR embarrassment for credit unions.

It doesn’t matter, though. This issue is too important.

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