MADISON, Wis. (6/18/14)--An article on NerdWallet.com Tuesday described how merchants reacted to the interchange fee cap rule by pocketing the difference rather than passing the savings along to consumers.
The article outlines the findings of a paper published by Todd Zywicki, a published, nationally recognized expert on consumer credit. He, along with colleagues at the International Center for Law and Economics, just studied the effects of the interchange rule.
Prior to the new law, interchange fees would be assessed by issuers, such as Visa and MasterCard, to merchants when a credit or debit card transaction was executed. Debit card usage was usually free of charge to the consumer. On average, the financial institutions would end up getting 2% of the transaction as interchange fees.
The interchange rule was intended to cap the fees, and was supposed to limit them to charges that were "reasonable and proportional to the actual cost" of the service. It reduced the fees financial institutions were collecting, allowing merchants to save money, which, they argued during the legislative battle that won the cap--they would pass along to consumers. Not so, says NerdWallet.
Under the interchange rule, merchant fees are capped at 1.12%. "Yet they keep that 0.88% difference rather than pass on savings to consumers," NerdWallet explained in the article. "What genius politician thought that merchants would pass on those savings? There is no incentive for them to do so. Merchants are businesses. If a business finds a way to save on costs, they will save on costs, which increases their net profit."
In a letter to Congress last fall, the Credit Union National Association (CUNA) and finance industry partners highlighted that "there is no evidence that consumers are seeing lower prices" on retail goods, a direct contrast from what they were promised by merchants.
"Despite promises by retailers, and despite a realized $8 billion windfall by these retailers over this past year, consumers have yet to see discounts for using their debit cards at the register," the letter said (News Now Sept. 24, 2013).
Credit unions and community banks are being harmed by the regulation, according to CUNA. The letter noted a U.S. Government Accountability Office study which found smaller community banks and credit unions, which were supposed to be "exempted" from the fallout of this legislation, have instead seen interchange revenue decreases of 5% in the first three months following interchange fee cap implementation.
(See related story: Retailers appeal 'interchange fee' lawsuit settlement.)