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Five Misconceptions about Interchange in America

Five Misconceptions about Interchange in America

Aite Group suggests regulators should refrain from capping card interchanges in the U.S., and rather encourage merchants to develop their own debit network.

Boston, MA, April 4, 2005 – In a new report, Five Misconceptions About Interchange in America, Aite Group critiques some common arguments heard for or against the interchange in the U.S., and provides suggestions to move beyond the conflict between issuers and merchants.

In 2004, card issuers generated about US$25 billion dollars in revenue from card interchange in the U.S., an amount equivalent to the total revenues of Fortune 500 companies such as American Express or Wachovia. Always a contentious issue in the U.S. since the 70s, the interchange has attracted renewed attention as interchange rates have continued to increase and regulators in other countries have become more interventionist (e.g., Australia, U.K., and European Union). While the case for capping the interchange mounts around the world, Aite Group believes the U.S. should refrain from regulating the interchange.

In this Impact Note, Aite Group argues that, though the U.S. bankcard industry could live without the interchange, capping the interchange would likely benefit merchants at the expense of consumers. Aite Group suggests merchants have other options left than relying on regulatory intervention to advance their cause, including building a merchant-oriented debit network a la Debitman. “In Germany, 53% of debit card transactions are processed via a merchant network that leverages the local ACH. U.S. merchants could certainly emulate their German counterparts. Not attempting to do so is an implicit recognition of the value that merchants get from bankcards” comments Gwenn Bézard, a Research Director with Aite Group and the author of the report.

This is a 13-page Impact Note. Clients of Aite Group's Retail Banking service can download the report.