Card Interchange Key to Robust Payments System, MasterCard Argues

PURCHASE, N.Y. — A recently released MasterCard International paper defends credit and debit card interchange as a key part of a robust electronic payments system that benefits everyone.The paper, “Benefits of Open Payment Systems and the Role of Interchange,” addresses the ongoing controversy over card interchange, underscoring what it called the enormous benefits delivered by electronic payments so ingrained in everyday life they are often taken for granted or misunderstood. Few people ever stop to consider the complex and sophisticated system that allows transactions to occur within seconds, almost anywhere in the world, the card brand said.“Perhaps the easiest way to grasp the value of electronic payments is to envision a world without them. Clearly, if electronic payments came to a sudden halt, many facets of commerce-travel, trade and the Internet just to name a few-would face dire consequences,” MasterCard President/CEO Robert Selander wrote in the paper’s introduction.The paper also discusses the role of interchange-a relatively small fee ultimately paid by merchants for the benefits of card acceptance. Interchange is critical to ensuring the system provides maximum benefits to all participants, including consumers and merchants in a fiercely competitive marketplace.In the area of general interchange education, the paper explains the differences between a closed or two-party payment system (where the consumer submits a card to a merchant who approves the transaction), a three-party system (where a single card brand issues the cards and approves transactions, such as with American Express and Discover) and a four-party system (typical of Visa and MasterCard).Interchange payments benefit all participants in the payment system, including merchants, by helping to balance the risks and benefits of offering cards, MasterCard said.“Clearly, one of the most important benefits to merchants is guaranteed payment the instant the transaction takes place. In four-party systems, merchants need not worry about billing or collection processes-all of that is handled by the card issuer,” MasterCard noted. “MasterCard’s open payment system enables merchants to focus on running their businesses and avoid the costs and risks of developing and operating their own payment systems.”Other costs that merchants avoid include the cost of funding transactions. Without the other parts of the payment system, including particularly issuers, merchants would have to fund those transactions themselves until the consumer paid the bill at the end of the billing cycle.Merchants also are spared the costs of credit losses, billing and collecting delinquent accounts and customer service, all things the card brands and issuers take on as their parts of the payments system.MasterCard also noted that the sheer numbers of participants in the payments system made it impractical to negotiate different fees for each merchant.“Each four-party system establishes a ‘default’ interchange fee. A default fee is necessary because there are tens of thousands of issuing and acquiring financial institutions participating in the systems. Working out separate agreements among thou-sands of participants would be inefficient and woefully impractical,” the card brand said.MasterCard also pointed out that the payments system is completely voluntary.“Interchange fees are set in a highly competitive environment, in which cardholders and merchants are free to choose among a wide variety of payment cards and networks. No one forces merchants to accept any payment product. When they accept cards, they choose to do so because they benefit.”MasterCard particularly went after the merchants’ accusation that interchange amounts to a “hidden tax” on consumers.MasterCard pointed out that card interchange often does not cover some of the costs of card issuing, contending that in 2007, the average interchange rate in the MasterCard system in the U.S. was 1.82% and average credit losses for MasterCard credit card issuers as a percent of transaction volume were 2.41%.“This means that, on average, credit card issuers lose more on credit losses than they receive in interchange. As economic climates toughen, credit losses are apprecia-bly higher,” the card brand said.“Interchange fees are neither hidden nor a tax. They are updated, published and readily available to all merchants-from retail giants to local mom-and-pop-type shops. They are no more of a ‘tax’ than any other cost of doing business, whether it be labor, rent, insurance, heat, electricity or costs associated with bad checks or theft of cash.To single out one cost of doing business and label it a ‘hidden tax’ is misleading and inaccurate.”The card brand did not comment further on the paper other than its initial release. The issue of card interchange seems likely to come up again this year in Congress, but it is unclear when, card industry sources said.–[email protected]