Regular readers are likely to know by now what “interchange” (aka “swipe”) fees are. They’re the cut of the transaction value that merchants have to pay to MasterCard, Visa and other payment processors every time a debit or credit card is swiped. Those payment processors keep only a small percentage of the fees, and most of the money is passed on to banks and credit card companies.

That’s set to change on July 21, when new Federal Reserve rules are due to cap swipe fees on debit cards at 12 cents per transaction. However, credit cards are exempted from the change, and the interchange fees on these look likely to continue into the foreseeable future at current levels.

Credit cards costly at UCLA

Perhaps the spotlight that fell on interchange fees when Congress discussed capping them alerted the University of California at Los Angeles (UCLA) to just how high they can be. This week, the university authorities announced that they would be imposing a 2.75 percent “convenience fee” on students who pay using certain credit cards for tuition and fees, housing costs, parking permits and so on. There are even suggestions that Visa-branded cards may be refused completely.

Emily Resnick, who is president of the Undergraduate Students Association Council was outraged, commenting in a press release:

Especially at a time when tuition is increasing substantially and steadily year after year, forcing students to pay yet another additional fee is unnecessary. While I understand that budget cuts compel the university to make changes, levying additional fees on UCLA students in this climate will put students in an even worse financial position. I will work with all parties involved to make sure that we have a solution that meets the needs of our students

However, Marsha Lovell, UCLA’s director of Student Financial Services, made an equally valid point when she told UCLA Today, a news resource for faculty and staff: “The change will save the campus more than $6.5 million a year while allowing the university to continue to offer the convenience of payment via credit card to those who choose that method without requiring all students to subsidize the option.”

Credit card companies’ case

This particular squabble illustrates a central problem with interchange fees: both sides make too much sense. On its website, the American Bankers Association argues about next month’s cap on debit card fees, and no doubt would propose the same points if it were ever to be suggested that credit cards should be similarly regulated:

According to the law, the Fed can only consider individual transactions and is specifically precluded from considering various other costs such as infrastructure and overhead expenses and account management and maintenance costs when establishing interchange rates. It’s like saying an airline can only price tickets based on the cost of fuel and have to ignore the cost of paying their pilots, the cost of buying and servicing their planes, the cost of air traffic controllers, and other expenses that make air travel possible.

Hmmm. Like all analogies, this one is imperfect, and doesn’t stand up to close scrutiny. Airlines have one principal source of revenue: tickets. Banks and credit card companies, on the other hand, have many, including customer interest payments (have you seen credit card rates recently?), annual fees and penalty charges, as well as swipe fees. However, the central point, that it costs money to run card issuers’ businesses, remains true.

Credit card use subsidized

The real argument comes down to which of these you regard as the less unfair:

1. That hard-pressed youngsters who were relying on paying their tuition and other costs using their credit cards should suddenly be penalized.
2. That all UCLA students should subsidize to the tune of more than $6.5 million a year the credit card use of those who choose to pay by plastic.

Scale up that dilemma to national levels, and you have in a nutshell the great interchange fee debate.

Published 06/22/11