The Costs and Benefits of Interchange

As with many institutions or policies, there are costs and benefits of implementation. For electronic payments in the U.S., interchange helps to fund a system that moves trillions of dollars annually. This is accomplished almost instantaneously, with a guaranteed payment to merchants, higher average transaction values, rewards to consumers, and state-of-the-art security features like tokenization. In the U.S., the costs and benefits of the current system are reflected in the data and the two charts below:

  • Credit: Contrary to popular belief. The U.S. does not have the highest credit interchange rates in the world. According to Lafferty Research, the U.S. isn’t even in the top ten. Although U.S. merchants face slightly higher costs to accept credit cards (3.5% of transaction value, on average) than merchants in Europe, Australia, or Canada, the value that U.S. merchants receive in return (+8.5%) is simply far higher what they pay. This results in a higher net value (+5.0%) for merchants than their European, Australian, or Canadian counterparts (Figure 1), according to 2018  data from Peter T. Dunn & Company LLC.
  • Debit: The cost of accepting debit cards for U.S. merchants (1.4%) is only slightly higher than the cost in Europe and Australia. Yet, the overall value (4.5%) is also higher, leading to almost the same net value (3.1%) compared to other countries (Figure 2).

Just like with regulation, net benefits should be the paramount consideration. If a rule imposes $500 million in costs, but delivers $2 billion in benefits, policymakers will likely move forward with the proposal. With electronic payments, merchants overwhelming benefit from the current system, or else why would they continue to accept cards? If costs were all that mattered, how would American Express—which typically has the highest merchant fees—be able to compete with the three other U.S. networks? The answer is merchants are well aware of the benefits of electronic payments (guaranteed payment, higher transaction values, and customer loyalty), which is one of many reasons why e-payments are growing by double-digits across the globe.