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Forced interchange fee reduction will spur new cardholder fees, eliminate rewards and reduce debit card availability for tens of millions of unbanked and underbanked Americans.
May 17
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To put his argument in perspective, consider the true anticompetitive and anti-consumer aspects of the current interchange system that his analysis ignores — a system that bilks Main Street merchants and consumers out of billions of dollars annually.
Grover erroneously argues that current interchange rates are necessary to ensure the functioning of the two sided debit market. These fees may perform a valid function when one side of the market bears disproportionate costs and would not participate without a transfer giving it adequate incentives. But they are hardly necessary. Numerous debit systems around the world, including the one run by our neighbors in Canada, thrive and generate transaction volume that far surpasses the U.S. system without any interchange fees. The success of checks in the U.S. with this same "at-par" pricing model reinforces the conclusion that interchange fees are not necessary in debit.
The high interchange fees that Visa has historically set for its debit products — particularly its inferior, fraud-prone signature debit products — reflect nothing other than a malevolent and systematic exercise of market power over merchants. Interchange is essentially a hidden consumption tax that consumers pay each time they use a Visa debit card to complete a transaction. To make matters worse, this hidden tax is incredibly regressive; it causes cash customers, many of whom live paycheck-to-paycheck in this tough economy, to unknowingly subsidize the generous rewards the affluent enjoy.
Grover does not address these issues. Rather, he claims that "the interchange debate turns on whether one favors consumer choice and markets" as opposed to regulation. But even this argument is a false one. Grover does not and cannot explain how the current Visa system, which prohibits merchants from surcharging to make the cost of various payments transparent to consumers, allows consumers to make informed choices when they pay.
As for Grover's well-worn argument that lower interchange will lead to higher cardholder fees, that is hardly a forgone conclusion. Vigorous competition on the card-issuing side will ensure that consumers are offered the most beneficial rates and rewards available. Even if this claim were true, we submit that the people who use plastic to benefit from rewards should be the people who pay for them. It is extremely inefficient to offload those costs on merchants or cash customers.
The Senate legislation is a huge step toward introducing competition in payments markets. If debit interchange fees are substantially reduced (or eliminated, as they should be), the business case for Visa's signature debit products will unravel and the PIN debit networks, and their safer and cheaper systems, might finally regain their prominence in the industry.
In sum, the current interchange system exists because payment markets have failed for decades. Fixing that is both pro-competitive and pro-consumer.
Matthew L. Cantor, partner
Jeffrey I. Shinder, managing partner,
New York office
Constantine Cannon LLP
