Bankruptcy

Why Is the Government Paying High Interchange Fees?

By Adam Levitin

The American Banker (subscription required) reports that Senator Dick Durbin has "added an amendment to an appropriations bill that would require credit card payments accepted at government agencies to be given the lowest available market interchange rates, which typically can only be negotiated by large supermarket chains."

The amount of money at stake is relatively small--perhaps $28 million/year. But it is rather astonishing that the US government doesn't already get rock-bottom interchange rates. If interchange is supposed to reflect the merchant's risk (an argument sometimes made), the US government should be getting the risk-free rate. It hasn't bee. Frankly, I'm not sure why the government should settle for getting the best rates available to large supermarket chains-that's not a risk-free rate. If interchange is about risk-based pricing, surely supermarkets should pay a premium over the government?    

But this just raises the question--is interchange about risk-based pricing or is it opportunistic pricing? It won't shock anyone that I think it is often the later: low rates are offered to induce industries to accept cards and once the industry has committed and has sunk costs, then the rates are raised to exploit the lock-in effect of consumers expecting to be able to pay with cards. Government interchange rates are pretty hard to explain from a risk-based perspective.

Final thought: will we see state copy-cat legislation? A number of states reserve the right to surcharge for credit card transactions. But if the state can get rock-bottom interchange rates, why bother surcharging? (Of course, some states--California and Illinois, e.g.--might be much worse credit risks than a lot of merchants...)

Full post as published by Credit Slips on July 29, 2010 (boomark / email).