A number of individual merchants, and a group of merchant trade groups, have filed lawsuits challenging interchange, claiming that the fees they pay to accept payment cards are too high. MasterCard believes these lawsuits are without merit, and are a clear demonstration of merchants wanting the benefits of accepting payment cards without having to pay for the value of the services they receive. The intention of this document is to set the record straight, by exposing their main arguments as myths and offering readers the facts about interchange.

Myth: Interchange is used to drive bank and credit card company profits and does not provide value to merchants.

Fact: Interchange is set to accomplish one goal: maximize output—meaning more cards in consumers’ hands, more merchants accepting cards, and more sales. It provides a mechanism for balancing the higher costs of issuing cards with the cost of card acceptance. The fact is that merchants accepting MasterCard receive extraordinary value for relatively small fee. That’s why in the last 40 years, MasterCard has gone from zero to almost 24 million merchant acceptance locations. It’s important to know that interchange is a small payment made by the merchant’s bank to the cardholder’s bank to balance costs in the system, and is only one piece of the overall fee, known as the merchant discount, that merchants pay their bank for acceptance.

The benefits to merchants of accepting MasterCard are significant, including increased sales, as more people are attracted to stores that accept their card of choice, guaranteed payment, and management of lending losses, fraud, and the costs of complying with regulations. Interchange enables merchants to participate in a payment system that is far more cost-effective for them than issuing their own proprietary card or some other form of credit.

Moreover, payment cards help merchants operate more successfully. Electronic payment transactions are faster at checkout, and the merchants who comply with our security guidelines are guaranteed payment. With less cash on hand, merchants are less vulnerable to theft and can provide safer workplaces for their employees. Paperless payments also save time and money by easing payment reconciliation.

Myth: Consumers receive no value from interchange.

Fact: Consumers realize significant value from interchange, including greater choice and flexibility. By providing incentives for card issuers, interchange encourages banks to innovate and develop new payment options, broaden the range of card products available to consumers, and invest in cutting-edge security and fraud prevention measures. Moreover, consumers can rely on the fact that transactions are safe and secure. And if a card is used fraudulently, cardholders are not held liable for any fraudulent charges, affording them a significant level of protection.

By challenging interchange, merchants and their class action lawyers are attempting to use the legal system to shift costs from the merchant community to consumers. Simply, cutting interchange fees would mean higher fees, less choice and fewer rewards for consumers.

Myth: Cutting interchange wouldn’t negatively impact consumers.

Fact: Interfering with the way interchange is formulated would have a significant negative impact on consumers. Without it, there would be less innovation in the payments industry, less choice for consumers and less money available to be spent industrywide on security and protective measures. Essentially, cutting interchange would mean higher fees, fewer rewards for cardholders and could potentially lead to long-term degradation of security or the system as a whole.

There is already strong evidence that this would be the case. In Australia, where interchange is now regulated, lower interchange fees have not led to lower prices for consumers. In fact, it has led to higher cardholder fees and card programs with fewer rewards and benefits.

Myth: Card company rules prohibit merchants from offering discounts for cash and check.

Fact: MasterCard has always allowed merchants to offer discounts for cash and check. Gas stations, for example, used to regularly offer cash discounts, but the majority independently ceased this practice. These types of businesses came to recognize that payment cards, such as MasterCard, offered them significant benefits over cash or check transactions. Payment cards help merchants operate more successfully. Electronic payment transactions are faster at checkout, and the merchants in compliance with issuers’ security guidelines are guaranteed payment. With less cash on hand, merchants are less vulnerable to theft and can provide safer workplaces for their employees. Paperless payments also save time and money by easing payment reconciliation.

Myth: The sole purpose of interchange is to make up for bad debt or fraud, which is more the fault of the banks than the merchants anyway.

Fact: Merchants pay an extremely small price for the value they receive from accepting MasterCard. For a relatively small fee, brick-and-mortar merchants are guaranteed payment, even if a card is used fraudulently, or, if at the end of the month, the cardholder doesn’t pay his/her bill. Additionally, Internet merchants, who often face higher fraud risks due to the absence of physical interaction with their customers, can assure themselves guaranteed payment if they implement SecureCode. SecureCode is a cardholder’s unique personal code that is registered with the cardholder’s bank, enabling the bank to authenticate the cardholder performing the transaction and provide the online retailer explicit evidence of the purchase. Interchange also covers significant costs such as billing and administering millions of cards, innovating new payment card products and rewards programs, and investing in security and fraud protection technology.

Myth: Credit and debit interchange undermines the Federal Reserve’s ability to measure and manage the nation’s money supply. Interchange should be regulated.

Fact: Government-regulated price controls would hinder competition within the marketplace and everyone would suffer the consequences. As noted in a January 12, 2005, editorial in The Wall Street Journal, in a similar move a few years ago, some politicians employed price controls to try to limit fees for using ATMs. In places where that was tried, the result was not lower fees, but fewer ATMs, and thus much less convenience for customers. There is other evidence that government-regulated price controls are not the answer. In Australia and other nations that have gone this route, the result has not been lower prices. Instead, consumers have been forced to pay higher card fees and receive fewer rewards and benefits, while retailers have pocketed the savings attributable to lower interchange fees.

Myth: Interchange is illegal. It’s simply MasterCard and Visa fixing prices.

Fact: Every business establishes a price for the goods and services it provides, and the payments business is no exception. In fact, the Supreme Court recently affirmed that joint ventures have broad rights to set prices for the goods and services they provide, without violating antitrust laws.

Moreover, every challenge to interchange has found it to be legal and appropriate. In July 2005 a federal court in the Northern District of California dismissed a lawsuit challenging interchange, saying that merchants, as indirect purchasers, do not have standing under U.S. antitrust laws to bring a claim against interchange. Judge Jeffrey S. White dismissed the case and rejected the plaintiffs’ request to file another complaint, concluding that future attempts by the plaintiffs in this context would be “futile” as plaintiffs would be “unable to marshal sufficient facts to confer standing.”

One of the landmark cases challenging interchange was brought by National Bankcard Corporation (NaBanco), an acquiring bank, against Visa. NaBanco alleged that Visa’s interchange fees constituted horizontal price fixing in violation of U.S. antitrust laws. In the NaBanco case, the appellate court rejected plaintiffs’ antitrust claims concluding that a default interchange rate was essential to offering a card in a four-party payment system and that interchange was indeed pro-competitive.

Of course, outside of the U.S., certain regulators have intervened in the free market and required that interchange be set in a particular manner or that it be reduced. However, even in these interventionists acknowledged that interchange is necessary to the functioning of the payments systems.

Myth: Merchants would forgo accepting MasterCard and Visa cards because interchange is too high, but can’t because MasterCard and Visa have market power.

Fact: No straight-talking merchant can dispute the value of accepting MasterCard. Merchants ran and continue to run their own proprietary card programs, and on average, each transaction on a proprietary card costs significantly more. In the MasterCard system, these costs are borne by the issuing banks, not the merchants. Part of the value MasterCard offers merchants is that all the costs of running the payments systems are managed for them. Merchants accept the payment types that make sense for the consumers they serve—end of story. The allegations of market power are disingenuous. If merchants don’t want to accept MasterCard, they don’t have to. But most choose to because of the value they receive. And that’s why MasterCard has gone from zero to more than 23.6 million merchant accepting locations in the last 39 years. The market power allegations do not account for the fact that merchants, like Neiman Marcus and Costco in the U.S., and thousands of smaller merchants, are successful without accepting either MasterCard or Visa cards. This is simply a matter of merchant choice.