Are interchange fees too high?

After seven years, the Competition Commission of Singapore recently decided that credit card interchange fees are not anti-competitive and do not need to come down. This decision might seem like it has no effect on shops in the heartlands or consumers’ budgets. But in reality, it results in the continuation of high costs for any company that accepts credit cards or debit cards and for any consumer who uses a card.

Even though interchange might seem like an obscure concept, it is actually quite simple. Every time a consumer uses his credit card or debit card, the store pays a “discount fee” to his bank. The company’s bank, in turn, pays an “interchange fee” to the bank that issued the card.

The interchange fee in Singapore is often 1.8 per cent or higher, which results in companies that accept cards having to pay more than 2 per cent and sometimes 3 per cent or higher to their bank. Naturally, they pass on this fee to consumers indirectly in the form of higher prices.

THE CCS DECISION

The interchange fee is generally set by Visa and the other card brands. In 2006, Visa decided to ask the Competition Commission of Singapore (CCS) whether its Multilateral Interchange Fee (MIF) violates the Competition Act.

To reach its decision, the CCS says it compared the current situation with what would happen if the current practice were not in place and if there were bilaterally negotiated fees between banks. Last month, the CCS decided that the MIF does not result in an appreciable adverse effect on competition in Singapore.

The CCS says it consulted many industry participants, including merchants and consumers, to reach this decision. What it does not say it did — and which other regulators in Singapore also have apparently not done — is to assess whether the current interchange system results in fees that are too high.

RATES REDUCED IN OTHER MARKETS

Other markets have done this assessment and found that the interchange fees like the ones in Singapore are too high. In recent weeks, for example, the French Competition Authority announced that Visa and MasterCard had agreed to limit interchange rates within France to 0.28 per cent.

Following proposed legislation from the European Commission for banks and payment firms to limit the fees they charge, European bankers expect other countries come to the same conclusion and lower fees.

Long before the French decision, the Reserve Bank of Australia (RBA) decided in 2002 to introduce a cost-based benchmark for interchange fees. The RBA said at the time that it expected interchange fees in Australia to fall from around 0.95 per cent to around 0.55–0.6 per cent, and interchange rates did fall to about this level, where they have remained since. Debit card interchange rates are even lower.

In the United States, Visa and MasterCard settled a lawsuit last year by agreeing to lower card interchange rates, although some merchants are suing for still-larger reductions in the fees.

If Singapore did something similar to Australia, Europe and the US, using information from the French Competition Authority or central banks or other regulators, interchange rates could drop a lot here, too. Bankers for the companies that accept cards could lower the discount fee, meaning that merchants could save money and potentially pass these savings on to consumers.

DO CONSUMERS BENEFIT?

Visa and other card companies often contend that when interchange rates drop, merchants do not actually pass their savings on and, at the same time, consumers do not receive as many benefits, such reward points, as they would have previously.

While some merchants surely might decide to keep the savings themselves, given the intense competition in Singapore, it is likely consumers would see, at least, some benefit from the lower fees.

Rather than just comparing the existing system with what might happen if the system were not in place, perhaps the CCS should look at other markets to see what they have found. Or, the Monetary Authority of Singapore could do what central bankers elsewhere have done and analyse whether current interchange rates are at the right level.

Lower interchange rates could both help out the beleaguered merchants who pay high discount fees and put more money into consumers’ wallets.

ABOUT THE AUTHOR:

Ron Tan has been involved in Singapore’s retail banking scene for over two decades.