Consumers will always bear the costs of payments infrastructure – the constant challenges to interchange fees are ignoring the problem.
MasterCard is being sued under the Consumer Rights Act (2015) in the UK, facing allegations of imposing “illegal” card fees, the costs of which were unfairly borne by consumers. These fees have come under fire numerous times in the past, usually from merchants – leading to a prolonged and expensive legal process in the US and fee caps being imposed by governmental bodies in the EU and Australia.
Interchange fees are not directly payable by merchants to MasterCard or Visa, though they do receive a cut of transaction fees from issuing and acquiring banks for transactions routed through their networks. These companies set the interchange fees (in theory; in practice, it is often now government bodies that set them via caps), which are payable by the merchant’s bank (the acquirer) to the consumer’s bank (the issuer) when a purchase is made. The merchant’s bank recoups the fee in the form of a “merchant discount” collected from the merchant, which in turn passes the cost on to the consumer. This flow of money is the “four-party model” which underpins all card transactions on the major schemes.
The four-party system is admittedly costly – there are a lot of parties involved, and each one is owed a cut of any given transaction (both to support the system and to make a profit) – which is ultimately paid for by the consumer. If fees are capped, banks lose a source of income – and to make up the shortfall, they will almost certainly look to applying (or raising) fees they charge to their customers to use banking services. One way or another, the consumer will end up paying to sustain the system – the real winners in interchange lawsuits are merchants.
There are cheaper potential alternatives for the movement of money between parties, such as blockchain and some mobile money systems which operate independently of the schemes. However, in order to truly compete with Visa and MasterCard these systems need to build up a network large enough that most consumers can access the payment tools they need and use them everywhere they want to shop. For an established company, this is a gigantic challenge. For a start-up, it is nigh-impossible. To make a system like this a reality will require the kind of concerted effort by the industry that created card payments in the first instance.
Ultimately, the consumer bears the cost of any system, whether directly or indirectly. The current system is imperfect and unwieldy, but it also provides a very real service to consumers – that of being able to buy almost anything, almost anywhere, via a logo on their card. To truly improve the position of consumers, the service provided under the current system needs to be equaled (or bettered) for a lower cost by something else.
Interchange fee challenges merely shift the cost around – to get consumers a better deal, a more efficient (and thus cheaper) alternative to the four-party model is required.
By Sam Murrant, Senior Consumer Payments Analyst