10. What the Banks Don't Want You to Know About Interchange Fees

When the Reserve Bank of Australia made rulings which required the banks to reduce their interchange fees by 40% there was an outcry from Visa and Mastercard, and the banks screamed that they would have to increase other fees to cover their loss of income from this source. Despite the real questions which the whole issue of interchange fees raises it would seem that the media are unwilling, or unable, to reveal the deceptive tactics which the banks have used. For those who are not aware of what "interchange fees" are, when a merchant processes a credit or debit card transaction where the card was issued by a bank other than the merchant's, the issuing bank charges the merchant's bank a fee to cover the cost of the transaction. Other bank ATM transactions come under the same umbrella because, in that case, the bank operating the ATM is the merchant. On the face of it that sounds reasonable: any business will want to cover the cost of its services to its clients. Anyone can see why the banks would be up in arms if they were being forced to take a 40% cut in one stream of income.

Unfortunately that's only half of the truth - the half the banks want you to know. Let's look at a hypothetical situation to illustrate where this argument comes unstuck. Take "the big four" and assume (for the sake of simplicity) that they process an equal number of transactions for each other. Bank A then pays Banks B, C and D for transactions they process on its behalf. This is the interchange fee. However, it also charges those banks for transactions it processes on their behalf. In the unreal world of perfect balance between them there would be balancing entries on both sides of the ledger. In other words the net cost to each bank would be ZERO, not hundreds of millions of dollars. Now add the smaller banks. They, too, process transactions for the other banks but their relationships with the big four are very lop-sided since it is far more likely that a merchant has facilities with the big four than with the smaller banks. Consequently the big four will process a much greater number of transactions for the smaller banks than vice versa. The fees which these smaller operators are charged will therefore far exceed what they are able to recoup through their own interchange fees. True, the Reserve Bank is impinging on the business operations of Visa and Mastercard, but the interchange fee serves to provide the big banks with even larger profits at the expense of the smaller banks (anti-competitive behaviour), and claiming the cost of outgoings without including the incomings for the same type of transaction is nothing short of deceitful. Many banks already charge exorbitant interest rates on credit cards, as well as merchant fees ranging up to 6% of sale values, so it was some relief to customers when an Australian court decided to not allow Visa and Mastercard complaints.

Maybe we should encourage our governments to reinvest in banks (or at least one, together - if that's possible) and charge people reasonable fees. The rest would quickly come into line and we'd all be better off.