Interchange Academy
The History & Impact of
Card Payments
Credit as a Form of Currency
• Before the plastic card used today,
customers used metal plates, coins and
other objects that could be used to incur
credit at a store or other place of business.
• Using these early credit cards allowed
consumers to conveniently purchase
goods at any time.
• At the turn of the century, large
corporations and department stores began
issuing proprietary cards.
The First Cards
• “Charg-It” cards allowed consumers
to make purchases and have the bill
forwarded to their bank,.
• Diners Club Cards were the first credit
cards in widespread use.
• Diners Club cards and those issued by
American Express for travelers’
expenses added convenience and
fostered growth in the American
economy.
Revolving Balances, Debit Cards, and the
Open Loop System
•
1958- Bank of America Corp. introduces the
first bank credit card called BankAmericard
• Revolving balance is introduced
•
1966
 Visa* issues general purpose credit
card
 Interbank Card Association establishes
national credit card system.
 This “Open loop” network allows
consumers to spend money now and
pay later.
 Program costs are shared amongst
members, allowing small financial
institutions to join networks.
•
1966- The Bank of Delaware pilots the first
debit card, allowing merchants to receive
guaranteed, instant payment.
Interchange Fees Allow for Further Expansion
• 1970- 16 percent of U.S.
households own credit cards,
greatly expanding the markets
for merchants nationwide.
• 1971- Visa establishes an
interchange fee to be paid by
the merchant’s bank to the
cardholder’s bank. This
nominal fee guarantees
payment to merchants and
fraud protection to customers
and merchants alike.
Interchange: The fee for the
exchange of money between banks
Payment Card Networks Now
• 2010- 30 years later, 80 percent of consumers own a debit card and 78
percent own a credit card.*
• 2010- The Dodd-Frank Financial Reform act passes with last minute additions
from Senator Dick Durbin that endanger payment card networks and the
benefits they provide across the American financial system.
• 2011- The Durbin amendment takes effect capping interchange fees, placing
the system at risk.
• 2012- The number of credit and debit cards in circulation in the U.S. is
projected to reach almost 1.7 billion, with a total purchase volume reaching
almost $4.5 trillion.
*Source: "The Survey of Consumer Payment Choice," Federal Reserve Bank of Boston, January 2010)
Benefits of Electronic Payments Systems:
Speed, Reliability, Convenience, Security
• Network connects…
• 25 million merchant locations in more than 150 countries
• About 2 million new merchants per year that join the system
• Nearly 30,000 small and large banks and credit unions that issue
cards worldwide
• Nearly 4,000 banks and card processors that provide card acceptance
services to merchants
• More than 2 billion cards in use worldwide
• Network manages…
• $3.3 trillion in annual payment volume
• More than 10,000 transactions per second
Retailers Make More Money and Lower Their Costs
When They Accept Credit and Debit
Retailers receive guaranteed payment.
• There is no such thing as a bounced debit or credit card payment.
• Merchants receive the money in their accounts quickly – typically within
twenty-four hours of the purchase.
Retailers save money on costs associated with accepting checks and cash.
• 187 million checks totaling $210 billion bounced in 2006, according to the
Federal Reserve. That’s about 512,000 checks per day.
• Food Marketing Institute reported a median loss of $284,124 in worthless
checks per FMI member in 2006.
• FMI reports $21,000 in additional costs per year per member due to
employee theft of cash alone
Retailers Increase Sales
• Businesses increase sales
by up to 50% when they
accept cards.
(Entrepreneur Magazine)
• When New York City
taxicabs began accepting
cards, revenue went up 13
percent – and tips
increased by 21 percent,
according to The New York
Times.
Retailers Increase Sales
• The Salvation Army began
accepting card donations at
its kettles in 2009 – the
average cash donation was
$2, while the average card
donation was $15.
• Online spending is projected
to grow to $250 billion by
2014, or 8 percent of all sales.
• In 2011, 122 million people
bought something online on
Cyber Monday alone.
16,000+ Financial Institutions, primarily Community Banks
and Credit Unions, Rely on Interchange Revenue
Green: Financial institutions with
less than $65 billion in assets.
Yellow: Highly competitive markets
Maroon: Large banks
Source: New York Times
How Electronic Payments Work
What is an Interchange Fee?
•Retailers that accept electronic
payments access a larger customer
base, reduced risk associated with
handling cash, and guaranteed
payment.
•For this, retailers pay a small fee,
known as the “Merchant Discount
Fee” (MDF).
•Interchange makes up a portion
of the MDF.
Interchange is One Part of a Revenue Stream
that Supports the Electronic Payments System
• Customer Service
• System Efficiency and Convenience
• Costs of Online Transactions
• Protection of Customer Data (compliance)
• Card Processing Costs
• Fraud Prevention and Losses (cyber-security)
• Maintenance and System Upgrades
Merchants avoid these costs by
not managing their own systems.
Current Controversies and Merchant Myths
What is the Durbin Amendment?
May 10, 2010:
Senator Dick Durbin (D-IL) introduces
an amendment to the financial reform
bill which would become the DoddFrank act.
The amendment was a political favor
for giant retailers to help them improve
their profits by setting price controls on
debit card acceptance fees.
U.S. Senator Dick Durbin (D-IL)
What is the Durbin Amendment?
Enacted on October 1, 2011, the Durbin amendment is creating a windfall for giant
retailers – and pain for everyone else.
• Capped interchange rates at around 23-24 cents per transactions – a 50% reduction.
• Represents an $8 billion dollar government bonus to retailers, with no benefit to
consumers.
• Consumers paying more for banking services as banks and credit unions look to
make up for the $8 billion loss.
• Small retailers selling “small-ticket” items now paying more, while big retailers
selling expensive items paying significantly less.
• Even community banks and credit unions, despite a theoretical “carve-out,” have
already begun to see reductions in interchange rates since Durbin enactment.
Congress gave giant retailers an $8 billion annual windfall through
unprecedented price caps on debit interchange fees, under the guise of
helping consumers – yet have steadfastly refused to commit to passing
those savings along.
Durbin Amendment: It’s Not Working
Consumers Suffer
Higher Costs
• No evidence that merchants have lowered their retail prices
• Paying more for traditional banking, cuts in rewards
• Small merchants are forced to raise costs
Less Convenience and Security
Durbin Amendment: It’s Not Working
Where’s My Debit Discount?
Retailers are pocketing $8 billion in profits from the Durbin
amendment
• According to an Ipsos Public Affairs survey, only seven percent of
respondents believe most retailers are passing their savings on
to consumers.
• Moreover, only six percent believe that retailers ever intended to
pass on savings.
• According to field research, 76 percent of retailers have either
raised prices or kept them the same after October 1.
Durbin Amendment: It’s Not Working
Where’s My Debit Discount at the
Pump?
• Debit is the overwhelmingly most popular form of
payment at gas stations but consumers aren’t seeing
savings.
• Gas retailers are saving $1 billion annually at the
expense of consumers thanks to the Durbin
amendment.
• Several years ago, Visa and MasterCard each
voluntarily capped or lowered interchange fees for
card transactions on fuel sales.
Durbin Amendment: It’s Not Working
Small Businesses Suffer
Higher Fees
• Prior to government intervention, interchange was about 1% for a
debit transaction.
• Now price-controlled transactions — both the $2 muffin and the
$2,000 television — are subject to the same rate of a few dimes
• For the muffin vendor, that’s nearly a 1000% increase in
interchange fees. For the big-box retailer selling the flat-screen
TV, they’re paying nearly 100% less.
• Small merchants selling everyday items are paying the price so
that big-box retailers can profit.
Durbin Amendment: It’s Not Working
Small Financial Institutions Suffer
“Carve Out” Fails to Protect
• Community banks and credit unions will ultimately be
harmed along with larger financial institutions.
• The routing and exclusivity provisions which contain no
such carve out increase the negative impact for small
banks as retailers begin to route more transactions
over lower-rate networks.
• In order to survive and maintain their debit card
programs, these institutions will face an impossible
decision to either increase fees, or stop issuing debit
cards altogether.
Merchant Myths
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.
Merchant Myths
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.
Merchant Myths
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 to the customer’s card issuing bank or credit union.
Merchant Myths
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.
Merchant Myths
Merchant Myth #5: Swipe fees are skyrocketing
Fact:
The weighted average of interchange fees 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.
Merchant Myths
Merchant Myth #6:
Merchants prefer all
customers to pay with cash
Fact:
Cash can be time consuming and costly.
Consumers spend more when using cards.
Airlines and supermarkets are just a few
industries moving away from
cash/checks to electronic payments .
Merchant Myths
Merchant Myth #7: Swipe fees
are higher in U.S. than in any
other country.
Fact:
The full amount that retailers pay to accept
payments in the U.S. actually compares
favorably to rates globally.
When you compare the total cost of
acceptance – including interchange,
acquirer fees, and other elements – the
U.S. is well below some other developed
countries.
Merchant Myths
Merchant Myth #8: The Durbin amendment
actually helped community banks and credit
unions because of an exemption.
Fact:
The theoretical “carve out” won’t work. Community banks and credit
unions will ultimately be harmed along with larger financial
institutions.
According to the May 2012 Fed report, exempt institutions saw rates
drop by 5.4% during the 4th quarter of 2011 – just three months after
the Durbin amendment went into effect.
Questions? Comments?
For further information please visit:
www.ElectronicPaymentsCoalition.org