Waitress taking couple’s order.
OBSERVATIONS FROM THE FINTECH SNARK TANK
CU Today reported:
“The National Restaurant Association is asking Congress to mandate reduced credit card interchange fees, expanding upon the Durbin Amendment under the Dodd-Frank legislation. The request is being made as restaurants seek assistance from Washington as the coronavirus shuts down businesses across the nation, with restaurants particularly hard hit.”
The article quotes National Association of Federal Credit Unions (NAFCU) CEO Dan Berger, who opposes the legislation, claiming that:
“Durbin Amendment proponents are once again looking to pull the wool over consumers eyes while our nation is fighting a national pandemic by advocating to expand this failed policy.”
Berger points to studies that found that savings that merchants reaped from reductions in the interchange rate when the Durbin Amendment was enacted never found its way into consumers’ wallets and pocketbooks.
The Payment Networks Should Proactively Reduce Interchange Rates for Restaurants
Berger makes some great points, and it’s a good bet that the card networks like American Express, MasterCard, and Visa agree with him 100%.
That said, the payment networks should take proactive, preemptive steps to reduce interchange rates for restaurants. Specifically, they should eliminate their portion of the interchange fee for a specified period of time, say, the next three or six months. They should do it for the:
- Political leverage. Voluntarily reducing interchange rates will give opponents of a mandated rate reduction some leverage to fight that battle. Opponents of the rate cut can argue that the amount the card networks are giving up will be a benefit for consumers. Even though that’s been proven to not be true, the NRA (restaurants, not rifle) can’t argue against it.
- Public relations gain. Consumers are generally clueless about what interchange is and why it exists. The merchants’ PR machine makes the financial community look like the bad guys. A voluntary reduction in interchange rates (while having relatively little impact on restaurants’ real viability) will make it look like the card networks are doing their share to help restaurants get through the current crisis.
- Bargaining chip. A mandated reduction in the interchange rate will impact all players in the interchange supply chain. A voluntary reduction in the interchange rate on the part of the networks will protect the share of the rate going to issuers. This could help the networks retain and maybe acquire new issuers when existing contracts come up for renewal.
- Potential longer-term gain. If restaurants don’t get some relief from the current economic conditions, many won’t be around for long. Would that mean a longer-term hit on the networks’ payment volume when conditions improve? Maybe not, but we’ve already seen some large merchants refuse to accept certain networks’ payments. Volunteering for interchange reductions could stave off future ill-will from restaurants.
How Much Money Are We Talking About Here?
The wide variation in interchange rates across various types of debit and credit cards makes it hard to estimate a total amount here. Here’s my back-of-the-envelope calculations.
Restaurant sales in the US in 2019 were roughly $863 billion, of which roughly 75% were debit or credit card-based. If we assume an average interchange rate of 2.5%—of which the networks get 5%—the card networks made about $840 million in interchange from US-based restaurants in 2019.
Assuming a 50% reduction in restaurant sales for 2020, the elimination of the networks’ portion of the interchange fee would come to roughly $400 million.
Total revenue for the three largest networks in 2019 was about $87 billion. The impact of a voluntary reduction in interchange fees to restaurants would amount to about one-half of one percent of 2019 revenues.
Save Yourself The Lobbying Efforts, Card Networks
NAFCU’s Berger argues that “the COVID-19 pandemic is no time to expand the failed policies of the past, and it is imperative that Congress reject expanding this anti-consumer policy.”
He’s right, but the public doesn’t care.
The NRA (restaurant, not rifle) will present arguments like “If Visa can afford to acquire fintech firms like Plaid for $5 billion, then it can afford to give back a little to the small restaurant owners who make this country the great place it is.”
Save yourself the lobbying efforts, Visa and MasterCard, and voluntarily reduce interchange rates for restaurants. It will make it a lot easier to reinstate them when the economy picks up.