Updated and New Website Content – January 31th
About Interchange
What Is Interchange?
Retailers that choose to accept electronic payments – such as credit and debit cards, or mobile
payments – do so for the opportunity for higher sales, a larger customer base, reduced risk associated
with handling cash, reduced bounced checks, and guaranteed payment. For this valuable service,
retailers pay a small fee to their bank or card processor, known as the “Merchant Discount Fee” (MDF),
which is a blended rate inclusive of amounts that go to all parties of the electronic payments network.
Interchange is the portion of that cost that the retailer’s bank pays to the cardholder’s bank or credit
union. Interchange revenue is critical to running a card program, partially reimbursing banks and credit
unions that issue the cards for the float on the funds, the risk of nonpayment or fraud, and other
services that have made these products so valuable and popular among consumers and retailers alike.
For example, the MDF that merchants pay on a $50 credit purchase averages around $1 – and less for
debit.
 The “interchange” portion of this fee would be about 82 cents for a $50 credit card transaction.
Because of the Durbin amendment, as of October 1, 2011, debit interchange is capped for
transactions (21 cents, plus 5 basis points (.05%), plus an additional penny for issuers that
qualify for fraud) for debit cards issued by banks and credit unions with $10 billion in assets or
more. For smaller banks and credit unions, debit interchange remains at about 0.8% to 1.1% of
the transaction.
What Costs Does Interchange Cover?
Interchange revenue covers a wide variety of costs for card-issuing banks and credit unions, including
customer service, system efficiency and convenience, the costs of online transactions, protection of
customer data, and card production costs, among many others.
Operations
In the moment that the card is run for payment, the transaction is instantaneously authorized, cleared
and settled – but to make that possible, there are operational costs for software, hardware, equipment,
labor, network processing fees, and transaction monitoring. These costs as well as billing and collection,
data processing, fraud prevention, card replacement, and customer inquiries and customer service are
incurred by card issuers. They also bear the substantial majority of the risk for fraud and insufficient
funds.
Investment
The safe, instantaneous and secure system we enjoy today took decades and billions of dollars in
investment to build. The maintenance and system operations require constant -and expensive – regular
upgrades to maintain the latest in technology and cyber-security.
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[Include Anatomy of an Electronic Payment image]
REMOVE the whiteboard video
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About Interchange > Myth vs. Fact
Myth vs. Fact
Setting the Record Straight on Interchange
Merchant Myth #1: Merchants can’t negotiate their interchange fees.
FACT: Merchants can – and do – directly negotiate with the networks to lower their interchange costs
through a variety of incentive arrangements with networks, including deals in which the savings are
rebated to the merchant. Some merchants prefer to handle the negotiation through their association or
other group arrangement. Entire categories of merchants have obtained lower interchange rates based
on their particular business needs.
For example, Visa and MasterCard capped interchange on gasoline sales and established
lower interchange rates for categories of merchants such as grocery stores, utilities and
convenience purchases. Also, merchants routinely switch processors for a better package and
price – and therefore have a much greater ability to negotiate card acceptance costs than they
do for most other business services, such as electricity, postage, water, or trash collection.
Merchant Myth #2: Merchants can’t offer a cash discount.
FACT: There is nothing prohibiting merchants from offering a cash discount. In fact, federal law allows
merchants to offer cash discounts, and the card networks all make very clear in their rules that cash
discounts are allowed. So the question becomes this: why aren’t they offering cash discounts now?
Answer – because doing so would make them lose money. Merchants are profiting off of individuals who
choose to pay with cash. What merchants really want is the ability to surcharge their customers at the
register, pick and choose which cards they will and won’t accept from their customers, and the removal
of penalties if they falsely advertise the cash discounted price.
Merchant Myth #3: Retailers pay interchange fees.
FACT: A merchant does not pay the interchange fee directly – he or she pays a merchant discount fee,
which is the blended rate. The Visa or MasterCard network transfers the interchange fee portion of the
merchant discount fee from the retailer’s bank or card processor (“acquirer”) to the customer’s card
issuing bank or credit union. The acquirer retains the balance of the merchant discount fee to cover its
costs for processing the transaction.
Merchant Myth # 4: Interchange fees are confusing
FACT: Merchants understand the exact breakdown of the fees they will pay based on the agreement
they each negotiated with their acquiring bank, including the interchange fee. Since fees and costs are
itemized on the bill from the acquirer, each merchant can easily calculate their effective rate – the
processing cost as a percentage of total card sales – to put interchange fees in the context of their
enterprise. If a merchant is confused about their bill, they should ask for clarity from their bank or card
processor – or shop around for a new one.
Merchant Myth #5: Swipe fees are skyrocketing.
FACT: The weighted average of interchange fees as a percentage of volume has actually decreased since
2005, even with the significant advancements in technology, convenience, and new security and fraud
protection measures – all advances that add significant value for merchants and consumers. In fact, in
Updated and New Website Content – January 31th
some significant sectors, interchange rates are decreasing even from lower-than-average levels. For
example, supermarkets have always paid extremely low card acceptance rates – and that rate has
decreased to around 80 basis points.
In the mid-2000s, debit card use in particular exploded; the 2010 Federal Reserve Payments Study found
that 35 percent of all non-cash payments were made with debit cards, making them the most popular
form of non-cash payment.
As sales volume grew, so did the total amount retailers paid to accept debit and credit, as it was charged
on a percentage of the sale. Overall, retailers were paying more overall to accept debit and credit as
volume grew – despite the fact that the actual average interchange rates remained relatively steady
over this same time period.
As the chart below demonstrates, the rate that merchants paid to accept cards actually went down from
2005 to 2009, as purchase volume increased.
Purchase
Total Fees
Merchant Fees Weighted Charge-Offs as a % of
Year
Volume**
Paid
Average
Purchase Volume
$48.56
2005
$2.651 Trillion
1.83%
3.04%
billion
$56.74
2006
$3.025 Trillion
1.88%
2.14%
billion
$60.82
2007
$3.526 Trillion
1.73%
1.97%
billion
$62.70
2008
$3.750 Trillion
1.67%
2.67%
billion
$62.06
2009
$3.663 Trillion
1.69%
4.30%
billion
This chart uses data from the Nilson Report, Issues 944 (March 2010), 942 (February 2010), 936 (October 2009), 924 (April
2009), 902 (May 2008), 877 (April 2007), 874 (February 2007), and 851 (February 2006). Figures for 2007 and 2008 include
American Express, Discover, MasterCard, and Visa general purpose credit cards.
Merchant Myth #6: Merchants prefer all customers to pay with cash.
Merchants are increasingly moving away from cash and check acceptance because of the many benefits
electronic payments offer over other forms of payment, including increased sales opportunities, higher
profit, guaranteed payment and cash flow. Airlines, grocery stores, restaurants and other industries
have adopted this model with success.
For instance, by accepting cards, the Salvation Army “cashless kettles” average donations went from $2
to around $15 when using credit or debit, a 650% increase. New York City cab drivers saw overall
ridership and revenue increase and tips double over “pre-plastic” days.
[Embed YouTube Video by MC about owner of NYC cashless restaurant]
Merchant Myth #7: Swipe fees are higher in US than in any other country
FACT: The total amount merchants pay for the benefit of accepting credit or debit cards – the merchant
discount fee – is in fact roughly the same in the U.S. and Europe, according to a 2011 report by the Aite
Group. In some countries, these fees are lower than in the U.S. because the government has interfered
with the market and imposed price controls on interchange. These countries consequently have less
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innovative debit systems – often relying on PIN debit, making online debit purchases impossible online
or at a merchant without a PIN pad.
Merchant Myth #8: The Durbin amendment only impacted large banks, because small banks and
credit unions are exempt from the law.
FACT: The so-called “exemption” for small financial institutions will not work. If debit cards from these
smaller institutions maintain the current free market rate, retailers may discriminate against community
banks and credit unions by refusing to use their debit cards, which tend to be more expensive than the
card offered by larger institutions. Small institutions would be left with no choice but to lower their rates
to match the government-set rate. They simply can’t afford such a massive loss in revenue, and would
be forced to turn to their customers and members to make up the difference.
In order to survive and maintain their debit programs, these institutions will face an impossible decision
to either increase fees, or stop issuing debit altogether. Regional financial institutions have already
attributed the Durbin amendment to branch closures and job layoffs.
 IBC Bank of Laredo, TX is closing 55 branches and laying off 500 employees.
 Associated Bank plans to close 21 branches in its three-state territory of Wisconsin, Illinois and
Minnesota in early 2012.
Merchant Myth #9: Retailers pay three different interchange fee charges.
FACT: When a merchant accepts a card for payment, he pays a “merchant discount fee,” which is
typically 2-2.5% of the transaction amount for credit card transactions – and less for debit. Retailers pay
for card acceptance because of the value they receive – guaranteed payment, cash flow, and increased
sales opportunities. Read more about What is Interchange [link]?
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Key Issues [landing page]
The goal of the Electronic Payment’s Coalition is to protect the value, innovation, convenience and
competition in today's growing electronic payments system. The coalition opposes burdensome
regulation at all levels that would stifle consumer choice and impact stability for the continued growth
of global commerce. TRISH: Do you have some better language for this to be an intro into our stance on
the issues?
Our Current Focus

Durbin Amendment
o Federal Reserve Rule
o Tester Corker Amendment
o Durbin Amendment – Helping or Hurting?
o Retailers’ Sue for Even More Profit
[We can add state legislation, other new issues that arise, here. Eventually, we can have a subsection
called “More Issues” where can move things to that have wrapped.]
Updated and New Website Content – January 31th
Key Issues > Durbin Amendment > Durbin Amendment – Helping or Hurting?
The Durbin amendment harms the bread-and-butter of America – consumers and small businesses. By
passing the Durbin amendment, Congress intervened on behalf of giant retailers and, giving them an $8
billion payday on the backs of consumers and small businesses. Everyone ultimately pays for the
unintended consequences of this ill-conceived legislation.
HARM TO CONSUMERS |HARM TO SMALL BUSINESS
[buttons to click through to sections below]
Consumers
Consumers are paying in more ways than one under Durbin.
Higher Costs
Despite promises by giant retailers, there is no evidence that merchants have lowered retail prices.
Consumers are paying higher prices for traditional banking services and dramatic cuts in rewards as
financial institutions seek to replace $8 billion in lost revenue that previously paid for services like
free checking.
A September 2011 survey found that just 45 percent of noninterest checking accounts are
now free, down from the peak of 76 percent just two years before.
Small merchants paying increased fees under Durbin will drive up their costs to cover the difference.
Redbox increased costs for DVD rentals by 20 percent in order to offset the higher
interchange fee for small ticket items.
Less Convenience
Consumers will need to carry cash – inconvenient and risky – as retailers may prevent customers
from using debit cards for small purchases.
Low income families may inevitably fall out of the traditional banking sector if they are unable to
afford these higher costs, further marginalizing them from access to needed financial services and
growing the unbanked population.
We’ve Seen This Story Before
A mandated reduction in interchange fees harmed consumers in Australia by raising cardholder fees
and reducing card benefits. According to a report by CRA International:
On average, the annual fees paid by consumers increased 22 percent from 2001 to 2004
while annual fees for rewards cards increased by 47-77 percent.
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Australian consumers are now paying $480 million more in additional fees.
Australian merchants, on the other hand, are benefiting – to the tune of $850 million per
year in higher profits.
Small Business
The same small businesses giant retailers hid behind to achieve their legislative victory are now the
ironic victims of this ill-conceived regulation.
Mom and Pop shops will pay MORE in interchange fees as the Durbin amendment is increasing the
cost of accepting debit for everyday items, like a cup of coffee or a turkey sandwich. These increased
costs may push small business owners out of business.
Prior to government intervention, retailers paid an average of 1.4 percent per debit
transaction to utilize card payment systems, which include important benefits such as
guaranteed payment and fraud protection.
Now price-controlled transactions – both the $2 muffin and the $2,000 television – are
subject to the same flat rate around 23 to 24 cents. Small merchants selling everyday items
are paying the price so that big box retailers can profit.
[SIDEBAR]
“Merchants now are trying to offset their higher rates by raising prices, encouraging customers to pay in
cash or dropping card payments altogether.” – “Debit-Card Fee Cap Has Nasty Side Effect,” The Wall
Street Journal, December 8, 2011
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Key Issues > Durbin Amendment > Retailers Sue for Even More Profit
Retailers Sue for Even More Profit
NACS et al v. Board of Governors of the Federal Reserve System
Congress intervened on behalf of giant retailers to help them obtain an $8 billion annual windfall
through unprecedented price caps on debit interchange fees, under the misleading guise of helping
consumers. Retailers motivated by greed sued the Federal Reserve board demanding an even larger
handout, unhappy with the Fed’s final rule. [link to final rule page]
The Federal Reserve’s Rule
The original, merchant favored proposal for interchange limitations would have slashed debit
interchange fee revenues by approximately $12 billion annually.
However, after receiving 11,500 public comments (more than 86 percent of which were opposed to
that legislation), the Federal Reserve compromised with a slightly higher, but still government
sanctioned, fee cap.
Retailers Looking to Pad Profits, Not Benefit Consumers with Lawsuit
What do consumers stand to gain from the merchants’ lawsuit? Not much. Despite their promises,
there is no evidence that merchants have lowered retail prices in any way, for anyone. Instead they
are pocketing the windfall and going back to the trough for more.
Merchants willingly press for government interference and regulation when it benefits them but
have steadfastly refused to accept any requirements to pass this windfall back to their customers.
Harm to consumers and small businesses [link, respectively] would be even more extensive.
[Industry Response?]