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1. INTERCHANGE FEES: The way the system works
Credit unions issue debit and credit cards to their members. Interchange revenue from the use
of these cards is vital to credit unions to support the administrative and fraud expenses of card
programs. Interchange fees allow business costs, including both operating expenses and the
risk of consumer nonpayment, to be shared by the payments participants.
When consumers shop using debit and credit cards, the retailer is guaranteed payment – even
if the card is used fraudulently or if the credit card bill goes unpaid. It’s a great deal for the
retailer, particularly when compared to checks. (With checks, if the check bounces, then the
merchant isn’t paid at all. Merchants used to lose millions in bad checks. More than 500 million
checks are forged annually in the US, according to Ernst & Young, with losses totaling more
than $10 billion. http://www.stopcheckfraud.com/statistics.html)
In return for a guaranteed form of payment, the merchant pays a fee called interchange, often
less than a penny per dollar.
But some retailers want consumers to not just shop at their stores – they want consumers to
pay the retailers cost of accepting payment. But they aren’t willing to commit to return any
savings to consumers – instead, it’ll hurt consumers:
Increased costs for consumers: For consumer-members, government intervention in
interchange fees would likely result in cost-shifting from retailer to consumers and
increase fees for consumers to obtain debit and credit cards. Interchange enables and
supports the convenience of credit cards and debit cards with competitive rates and
terms.
Decreased competition for consumers: Debit and credit cards obtained through credit
unions offer competitive rates and consumer-friendly terms. By managing a debit or
credit card account through a credit union, a member is able to effectively manage their
bills and establish a strong credit history. Interchange enables credit unions of all sizes
to issue debit and credit cards for its members.
Unfair disruption of marketplace: The retailers’ legislative proposals would unfairly
disrupt a functioning marketplace by giving merchants an enormous competitive
advantage over card-issuing credit unions in interchange negotiations. Any resulting
reduction in the merchants’ interchange responsibility would shift to the consumers;
resulting in higher fees and reduced access to a convenient and cost-effective payment
card system.

2. Changing Interchange Fees is a Cost Shifting Proposal:
•
Every payment system comes with costs:
Cash: Printing (paid for by taxpayers), Infrastructure (paid for by tax payers and financial
institutions), Security (paid by retailers and financial institutions), Losses from fraud
(paid by retailers)
•
Checks: Printing (paid by consumers), Infrastructure (paid by financial institutions),
Losses from fraud (paid for by retailers and financial institutions)
•
Debit and credit cards: Printing (paid by financial institutions), Infrastructure (paid by
financial institutions, retailers, and consumers), Security (paid by financial institutions),
Fraud losses (paid by financial institutions)
Retailers benefit the most from credit and debit cards by being sheltered from fraud losses –
shouldn’t they bear their part of the cost of the system? If they don’t pay their share – who
will?
Consumers.
Facts Retailers Don’t Discuss:
Claim: It’s increasing the cost of goods.
Fact: If that’s the case, why wouldn’t retailers agree to pass on savings to consumers? Retail
trade groups refuse to agree to be required to pass savings on to consumers. If the experience
of other countries is any guide, then its likely retailers will just keep the fees – and consumers
pick up the expense. In fact, retailers can offer cash discounts. But the vast majority don’t.
Interchange allows for those who receive the most benefit – retailers – to bear a tiny part of the
cost of the technology, credit, and fraud losses of the system.
Claim: The costs are going up.
Fact: No, the USE of cards is going up, but the percentage charged has NOT. The fact is that
people are shopping and using their cards more often. This means fewer bounced checks and
cash handling security concerns for retailers.

3. The GAO on Interchange:
In November 2009, the Government Accountability Office released a report on interchange
which validates many of the points that credit unions have been making for several years.
Among the report’s findings, the GAO stated that:
•
“Consumers have benefited from competition in the credit card market, as cards
often have no annual fees, lower interest rates than they did years ago, and greater
rewards.” (Executive summary)
•
“Many industry participants and others agreed that the costs of card acceptance
might shift from merchants to card holders if interchange fees were limited, card
surcharges permitted, and interchange revenues decreased.” (p.55)
•
“Increased competition for acquiring services provides merchants with considerable
choice and opportunities to negotiate and lower some of their card acceptance
costs.” (p.35)
•
“Eight of the nine small merchants we interviewed reported getting solicitations –
some frequently – for their acquiring business or have shopped their acquiring
business.” (p.36)
•
“Representatives of credit unions and community banks reported that revenue from
interchange fees allowed them to cover expenses related to offering credit cards
and compete with large issuers to offer their customers credit cards.” (p.22)
•
CRA INTERNATIONAL describes what happened in Australia from this same type of
proposed regulation: “Mandated reductions in interchange fees have had the
opposite effect of those that regulators were expecting. Retail prices are not lower.
Instead, merchants enjoy stronger margins thanks to the lower cost of accepting
cards. To make matters worse, banks have pretty much recovered their lost revenue
by charging higher cardholder fees and cutting investments in payment innovation.
Customers are the losers in this messy experiment.”

4. How the Debit and Credit Card system works:
The Infrastructure