The topic of interchange rates is a flash point in the payment card industry. Merchants have argued that the global payment card networks have so dominated the payments industry and are of such strategic importance to the world’s commerce that they require government oversight. Left unchecked, the card networks can at a whim to raise the interchange rates that merchants pay to accept payment cards, leaving merchants with no choice but to comply since not accepting cards would put them out of business. Issuers, as the beneficiaries of interchange, counter that the interchange they receive is used to invest in fraud management tools to protect the payment system for all and that it funds new payments technology and provides the revenue to offer cardholder rewards, which encourages consumers’ further adoption of card transactions. Both sides present themselves as pro-consumer—the issuers through rewards programs, and the merchants through promises that lower interchange will lead to lower prices at the point of sale. Unfortunately, it is extremely difficult to determine the effect of lower interchange on store prices since so many other factors and are intertwined.

In countries where regulators have sweeping authority over corporate activities that they determine to be anticompetitive, the task of setting interchange is taken from the global payment networks and placed in the hands of regulators. Some governments have become wary of the concentrated power of the card networks, most of which are headquartered in the United States. Regulators’ involvement often has the effect of not only decreasing rates but also simplifying them. Where networks would establish complex tables of rates reflecting interchange variations for businesses based on type, payment volume, or risk for a transaction type, regulators tend to set one rate that is applied uniformly.

Where regulators have less power, such as the United States, the arguments involving interchange and related payment network rules play out in court or the legislature. In the United States, a 13-year class action lawsuit, Payment Card Interchange Fee and Merchant Discount Fee Antitrust Litigation, brought by merchants seeking reimbursement of unfair costs, concluded only recently in September 2018. Although the court has closed the books on this legal action, several large merchants removed themselves from the lawsuit so they can pursue their own litigation regarding interchange against the global networks on their own or use the threat of legal action as a point of leverage to negotiate lower rates for just their business. Other suits have been filed to decide related issues such as the freedom for merchants to accept some card types, such as debit cards, but not other card types, such as reward credit cards, which typically incur a higher interchange rates (the “honor all cards” rule). Merchants have also argued in court that they should be allowed to surcharge consumers for using a card to make a payment in order to recoup the costs of accepting that that type of card, to discourage its use, or to offer discounts on payment types the merchant prefers. This practice had been banned through network rules to prevent customers’ confusion over whether their particular card would be accepted at stores where the network brand was displayed.

The Mercator Advisory Group research report, Global Interchange Regulation: Impact on Debit Cards, takes a look at several countries that have experienced recent changes in debit card interchange, how the rates were established, what brought about those changes, and what the potential impact to debit cards and underlying banking accounts might be.