As merchants complain, and consumers begin to realise the extra charge they are in fact paying to subsidise the interchange fees, its only a matter of time before alternatives arise.

Transaction Processing | Interchange wars: Merchants tug networks for change | ATM Marketplace Research

BY Missy Baxter, contributor • Consumer advocates say rising interchange fees are a serious problem, costing cardholders and merchants a total of at least $25 billion each year. Last month, dozens of protestors demonstrated against rising interchange fees outside the Javits Center in New York during the National Retail Federation’s annual convention.

Recently we saw rumours of Bank of America opting out, by creating their own network.  With Banks of that scale this alternative becomes more viable.  Now we see the Fed stating they will stay out of it, meaning they won’t regulate.

Relevance to Bankwatch:
Interchange fees and the financial model for payments will be a new frontier for banks to re-invent aspects of their business.

The U.S. Justice Department also has no plans to intervene.

“That leaves the courts as the avenue for change,” Weiner said. “And it’s likely to remain that way for the short-term.”

Tom Brown, vice president and senior counsel
at Visa, said government rate-setting of interchange fees won’t work in
the U.S., even as countries like Australia and Canada, where Visa and
MasterCard also dominate payment systems, have adopted it.

Brown said Australia’s experiment with
interchange rate-setting has advantaged the merchants at the expense of
the bank-owned networks, like Visa and MasterCard. The
government-ordered interchange-fee reduction from roughly 90 basis
points to 50, has cut revenue to participating banks and the networks,
he said.

“As a result, merchants are paying less for
bank-issued cards, and cardholders are paying higher fees and higher
finance charges,” he said. “Cardholders have lost quite a bit.”

Visa favors the current system of
rate-setting, because Visa is one of the market’s dominant players,
running alongside MasterCard, the Fed and, to a lesser extent, American
Express and Discover.

But David Balto, a Washington lawyer whose
firm is representing merchants in one of the Visa/MasterCard suits,
suggested consumers benefit more in the long run from lower interchange
fees.

“The consumer benefits are reduced costs to merchants that can be passed along to consumers,” Balto said.

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