Refer To The Artcle merchants Shred Costs Of Plastic Enclosed - Article Example

Merchants shred costs of plastic” Interchange fees are those bank charges for the processing of transactions using debit and credit cards which are deducted from the payments to the merchant in the sale side of the transaction. A simplified depiction of the interchange transaction mechanics is shown in the diagram below. There is sufficient justification for the charging of fees in terms of services extended by these banks, in terms of the processing of transaction information for the merchant, and the setting up of the necessary systems in terms of hardware, people, and applications to support these processes (Pacheco & Sullivan, 2006:93).

Interchange fees are computed as a proportion of transactions, thus one would tend to reason that higher sales facilitated by electronic payments that redound to the benefit of the merchant should more than justify the fees charged by the banks. However, consumer expenditures paid for by cards have increased from only 3% of merchants’ sales in 1986 to 25% in 2000. Therefore, there is a geometric net increase in the amount of interchange fees which merchants have to absorb (Lyon, 2006). Understandably, merchants seek ways to reduce this charge.

Although the recently passed debit interchange price-control amendment imposed caps on interchange fees, Sidel (June 21, 2011) points out that merchants are finding ways at the point of sale to discourage card use and instead pay in cash. One is the lowering of limits of cash that may be gotten back by customers who make purchases on debit cards. Another is the offering of substantial discounts for cash or checque purchases instead of cards. Pacheco & Sullivan, 2006, p. 93 The apparent intention of these measures is to entice customers to return to cash purchases or payment by checques.

Card issuers have argued that these courses of action are anti-competitive, since “interchange fees are the primary source of revenue for debit cards, and the No.2 source of revenue for credit cards” (Grover, 2010:8). By forcing the reduction of interchange fees, new and higher cardholder fees are bound to be levied by banks in order to make up for these lost revenues, which will in turn be passed onto the consumers. Issuing banks have several alternative market strategies to address the market for plastics.

One is the removal of annual fees, which is the model applied in the UK (Hayashi & Weiner, 2006:102); this allows consumers to hold credit cards with no added cost to them, and stave off intentions to dispose of them entirely. Another would be to set up a facility with a lower capitalization, since issuers with assets below $10 billion are exempted from the interchange reduction scheme (Grover, 2010). Finally, another market strategy would be to collaborate with merchants to create card products that allow for delayed or instalment payments as well as rebates and rewards systems for cardholders to be persuaded to transact because they acquire added value from their card transactions.

Bibliography:Grover, E. (2010) “Interchange Plan Is Anti-Competitive.” American Banker, 5/18/2010, 175(76):8Hayashi, F. & Weiner, S. E. (2006) “Interchange Fees in Australia, the UK, and the United States: Matching Theory and Practice.”. Economic Review (01612387), 3rd Quarter, 91(3):75-112Lyon, J.M. (2006) “The Interchange Fee Debate: Issues and Economics.” The Region, June. The Federal Reserve Bank of Minneapolis.Pacheco, B. & Sullivan, R. (2006) “Interchange Fees in Credit and Debit Card Markets: What Role for Public Authorities?

” Economic Review (01612387), 1st Quarter, 91(1):87-113