There are three ways banks that issue credit and debit cards can gain revenue from them: interest rates (in the case of credit cards) charged to consumers, fees charged to consumers via their bank accounts, and something called an interchange fee that the customer’s bank charges the merchant’s bank when the card is used. The interchange fee has long been the subject of resentment by merchants and so various arguments are used to promote the idea that these fees should be capped through regulation.
One of the prime arguments used is that there is a lack of transparency in interchange fees and that a cap will promote transparency so that customers know that some of the price they are paying goes to their bank. This argument was one of the prime reasons why the European Union agreed to cap interchange fees earlier this year.
Transparency, however, comes with its own costs. When the U.S. Government Accountability Office examined the options for disclosing interchange fees in 2009, it found substantial negatives for both consumers and merchants in requiring disclosure:
Such disclosures could be confusing for consumers. Merchants, issuers, and card networks expressed concern that their customers might not understand the information and might misinterpret the fees listed on the receipt or bank statement as an additional charge, rather than as a component of the total price. Merchants told us that it is very difficult for cashiers to distinguish between the numerous types of debit and credit cards, which have varying interchange rates. Thus, it could be very complicated for a cashier to clearly communicate to the consumer the correct interchange fee for the specific transaction.
Additionally, whichever party is responsible for disclosing information about interchange fees to consumers would incur the costs of updating its technology to allow for such disclosures. For disclosure in merchant receipts, merchants would incur the cost of changing their receipts. Issuers have reported that changes to card statements, such as the inclusion of additional disclosures, would generate costs for them.
Moreover, it is odd that merchants would lobby for transparency over one small component of an overall pricing judgment on their part. Would retail merchants support more wide-ranging transparency regulations in their stores, where the merchant would be required to post the wholesale cost of each item alongside their marked-up retail price? Would they be happy to disclose all transportation costs associated with the price? One has to wonder where the argument should stop. Given that we are starting to worry about “disclosure fatigue” and the effectiveness of disclosure in informing consumers, the probability of transparency forcing the sort of competition it desires is low. We know that Australian consumers have not responded the way the Reserve Bank thought they would after its first round of regulation.
Moreover, prices simply do not work this way. Consumers do not know, nor have they ever known, all the complexities behind electronic payments networks’ security protocols, network connections, and costs. Nor should they have to know. Consumers are seeking convenience, security, and in many cases reward program points. They do not care about details so much as they care about their own interests, and interchange regulations tend to hurt their interests by destroying the rewards programs they like (this is one of the objects of the Australian regulations), and even ending their free checking accounts. If transparency is important, perhaps there should be more transparency in how interchange regulations have hurt consumers’ interests wherever they have been implemented.