Interchange: Recalibrating the Scale

March 29, 2006


San Francisco, CA, USA March 29, 2006

Evidence suggests that it is time to re-examine the structure and motivation behind interchange.

Pressure is mounting for two of the most contentious rules governing the credit card industry. Interchange, a fee merchants pay to credit card issuers, and the No Surcharge rule, which prohibits merchants from charging a fee to credit or debit card paying customers, are facing new challenges. The rising threat of litigation and the changing economics of the credit card market raise questions about the future of the interchange and No Surcharge rules.

In a new report, , Celent considers many of the arguments being made in the market and their weight relative to market trends. Celent also looks for trends that may be indicative of an unhealthy market and that may begin to provide grounds for intervention, and analyzes the impact possible resolutions would have on merchants and customers.

Both sides of the debate have made strong arguments regarding the restrictions placed on merchants, the art of price fixing, and the question of whether the rules are socially optimal. "What has often saved interchange in the past is the inability to prove that it is harming the market, that a better pricing alternative exists, and that society would be better off with regulation," says Ariana-Michele Moore, senior analyst and author of the report. "However, the markets are maturing, and the old arguments in support of interchange are losing ground."

Issuers have not been helped by the recent spate of lawsuits. During the past nine months, over 40 merchant actions have been filed challenging the No Surcharge rule or interchange. Increased legal activity has some card issuers changing their stance. For instance, Discover recently announced it would drop its No Surcharge rule. If these legal battles continue, issuers will ultimately face pressure to lower interchange fees.

But if interchange fees are decreased, customers may not like the results. Recent rule changes in Australia illustrate that a decrease in interchange would cause issuers to increase annual fees and be more stingy with reward programs. It is also unclear how merchants would react to a lower interchange. The hope is that merchants would pass on the benefits to customers in the way of lower prices, but skeptics believe merchants may not be so generous.

One thing is clear: the payment card industry is a complex system involving numerous parties, and there is no easy resolution to the interchange debate. But ultimately the industry will need to install a fee-based system relative to the benefits that would: help issuers sustain their revenue models; shift the revolving consumer population to the debit card system; ease up on the margin pressure facing merchants; and give weight to a consumer's decision when using credit or debit card products.

The 39-page report contains 18 figures and 4 tables.

A table of contents is available online.


Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned operating unit of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

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Michele Pace
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Table of Contents

San Francisco, CA, USA March 29, 2006

Executive Summary 3
Introduction 6
Understanding Interchange 8
  The Logic Behind Interchange 8
  Related Bylaws 9
  Questions Raised 10
Have We Reached The Tipping Point? 14
  The Growth of Credit 15
  Debit Cards 17
  The Total Landscape 20
  We Stand Before the Tipping Point 22
The Need To Re-Examine Interchange 23
  Issuers & Competitive Spiral 23
  Steady Interchange? 27
  Merchants & Weight They Bear 28
  Happily Spoiled Consumers 30
  The Market's Bill of Health 31
Is Regulation The Answer? 33
  Regulators' Challenge 33
  What Will Not Work 34
Conclusion 36
Objectivity & Methodology 38

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