Regulations span across authorities such as central banks or finance ministries and include caps on the interchange rate, mandated competition among card networks, and guaranteed autonomy for merchants to manage interchange costs. CMSPI’s Global Interchange Report analyses the impact of interchange regulation by authorities worldwide and identifies effective methodologies used by regulators to ensure maximum benefit for merchants and consumers.
Interchange Regulation Savings
As of 2019, global regulation limiting interchange, the largest component of the merchant service charge, has generated an estimated $82 billion in annual savings to merchants. This figure includes $10.4 billion a year saved when the European Union lowered interchange fees to 0.2 percent for debit cards and 0.3 percent for credit cards in 2015. Also included is $9.4 billion in annual savings generated from the 2011 U.S. Federal Reserve caps on single-message debit transactions.
Total savings includes regulations across Europe, Africa, Asia, and the Americas. With that, the report provides global coverage, analysing 26 countries and the EU total, which account for nearly 70% of global GDP.
Merchant and Consumer Impact
Merchants and consumers are the intended beneficiaries of interchange regulation. As such, the report quantifies the impact of interchange regulation on these key stakeholders. In some cases, the financial benefits of interchange regulation to merchants and consumers can be eroded by higher fees and reduced benefits. These include higher network fees, reduced rewards programs by issuing banks, and reduction of savings by the merchant acquirer.
For example, in the case where interchange regulation and acquirer margins are unregulated, consumers are expected to land in a net negative position. According to the report, consumer benefit is eroded by card issuers reducing rewards programs and increasing fees on checking accounts, resulting in a $2.3 billion reduction in savings benefits for consumers.
In another example, the report estimates that 40% of interchange savings for merchants are further eroded within eight years of interchange regulation by network fees. In the U.S., annual network fees have risen to $4.9 billion since 2011, eliminating over half of the annual interchange savings generated from the Federal Reserve interchange caps.
Given the impact of regulatory erosion, the report highlights regulation that ensures merchant pass-through of interchange caps and limits on increasing scheme fees. In addition to the interchange limits, these complimentary regulations also contribute to the $82bn total savings figure.
Necessity of Interchange
Given the efficacy of card networks that charge zero interchange, the report questions whether interchange fees are necessary, adding there is “no robust justification” for the high fees and highlighting the sufficient revenues banks generate from overdraft fees and interest payments. Additionally, the card industry routinely posts high profits, with card networks reporting average operating margins of 52 percent, acquirers 36 percent, and issuers 23 percent. These figures dwarf the 3 percent of average operating margin for retailers.
The report signals to regulators that while interchange regulation is key in ensuring robust competition for merchants and fair prices for consumers, merchants and consumers may not always receive the full benefit of interchange limits. Regulated network fees and guaranteed acquirer pass-through of interchange reductions to merchants are additional areas of regulation authorities must consider for merchants and consumers to fully realize the benefits of interchange regulation.