[Dave Birch] Remember when, in response to mounting anger over the absurd fees levied by airlines on customers using payments cards, some of the worst offenders tried a rather obvious ploy to get around potential regulation?

Easyjet is now referring to the charge as an ‘admin fee’ which has jumped from £5.50 to £9 per booking.

[From Fury as low-cost airlines ramps up price of debit card bookings and luggage charges | Mail Online]

It didn’t work. The Office of Fair Trading’s recent ruling that airlines have to include the cost of a debit card transaction in their ticket price is absolutely the right one. It means that the airline can impose surcharges on credit cards, cheques, cash, old gold and cowrie shells but they cannot impose a surcharge for debit transactions. Provided that the ruling includes pre-paid cards I say it was absolutely spot on. And that’s got nothing to do with the antics of “budget” airlines. It’s because we know that debit transactions impose the lowest total social cost. They are best for society as a whole, so pricing should reflect that.

In the US, it now it looks as if the surcharging argument is about to start up again, although this time (as far as I can see, and I do stand to be corrected) it’s about regulatory capture and the re-allocation of private costs rather than a rational minimisation of social costs. 

Merchants may soon begin to impose a surcharge each time a customer pays with a credit card, a practice Visa Inc. and MasterCard Inc. currently prohibit.

[From Price of Using Credit Cards Going Up? Merchants May Get Surcharge Rights – WSJ.com]

This is another phase in the extended battle between banks and retailers. The predictable impact of capping debit fees was that banks in the US — including the ones with the bulk of retail customers  — started to charge for debit card usage, hoping to drive customers to use credit cards instead.

Bank of America Corp. is laying plans to charge millions of customers a $5 monthly fee to use their debit cards, and other big banks are expected to follow suit. The industry says it needs the fees to recoup revenue it will lose because of new government regulations taking effect Saturday that cap what they can charge merchants for debit-card transactions

[From Banks Plan New Fees for Using Debit Cards – WSJ.com]

This was utterly obvious at the time, when despite the nonsense headlines it was clear that there would be no consumer benefit from Durbin. And I’m not saying this with the benefit of 20-20 hindsight. I knew this to be the case at the time.

Merchants and their customers will save billions of dollars when new Federal Reserve regulations cutting debit card swipe fees roughly in half take effect this weekend, the National Retail Federation said today.

[From NRF Says Swipe Fee Cut Will Save Merchants and Consumers Billions | Reuters]

And I was right. Not because of luck or psychological profiling of key figures in the retail sector, but because I had subject matter expertise. So how did it all turn out?

Unfortunately, we don’t live in a perfect world. As I pointed out on Wednesday, retailers aren’t cutting prices. Instead, they’re pocketing the $7 billion or so they’ll save in fees.

[From Did Congress Kill the Debit Card? – Daniel Indiviglio – Business – The Atlantic]

This is exactly as I predicted. Again, I stress, not because I’m especially clever, or because I have especially effective crystal balls, but because it’s a) exactly what I would do if I was a retailer and b) exactly what retailers did do in Australia when interchange fees were capped there. What regulators ought to be doing is allowing more competition in the payments sector, not trying to work out what interchange fees should be (since neither they, nor anyone else, knows what the correct answer should be).

The regulators should be regulating according to principles, agreed targets, that sort of thing. Debit cards, and pre-paid cards, deliver the minimum social costs. Therefore, they should be the zero point: any bank offering a checking account should be required by law to provide a free PIN debit card with a zero interchange fee (and, in the UK, free access to the Faster Payment Service by retail customers). This should be the price they pay for being allowed to hold customer funds in checking accounts. Every other payment mechanism (including cash) should then be charged for. The people who draw cash out of the ATM and then use it in the supermarket are the people who should be paying, not the customers who use PIN debit.

Now I can hear some readers of a more libertarian bent saying that surcharges are nothing to do with the government. Surcharges are sort of how the market should work. Merchants should be able to charge what they like, shouldn’t they? Well, no. And for the same reason that I’m not allowed to build a nuclear power station in my back yard or chop down Horsell Common for firewood. We live in a society, and sometimes our actions are constrained for reasons of societal interest. Merchants shouldn’t be able to charge what they like for payments. The regulators should constrain merchant choices about payment so that they are aligned with what is best for the whole of society not with what is best for them. The regulators goal for retail transactions is not, I repeat not, to minimise the private costs of whoever has the best lobbyists. The OFT, for one, should be active in pursuing this goal.

So where should the OFT aim its big guns next? If I were to be advising them, I’d have no hesitation in identifying the next target group. When it comes to outrageous surcharging, taxi companies make Ryanair look like a charity. It’s bad enough that taxi drivers in London charge a 10% “convenience fee” (Why should we have to pay extra for convenience? Surely convenience should be part of the basic plan) but it turns out they’re amateurs when it comes to non-cash gouging. Over in Swindon City-of-the-Future they have professional gougers.

She spent £36 on a trip that, had she paid cash, would have only cost £12.

[From £36 extra charge for a £12 cab ride (From Swindon Advertiser)]

This is a story about a taxi company that makes a £20 minimum charge for taking a card payment. Unbelievable. Why the taxi drivers so desperately want cash that they insist on this minimum is beyond me. Why they can’t just sign up for iZettle and pay 2.75% and be done with it I don’t know. But I do know that last time (this was in Weybridge) that I took a taxi and then realised I didn’t have any cash, I had to a) have the driver find an ATM which cost me money b) get out and go and withdraw cash which costs me time and c) pay a free (about £2 if memory serves) to the ATM provider all because the driver wouldn’t take cards. This should be against the law. The ability to accept debit-like retail payment instruments (DLRPI: I haven’t thought of a snappier name yet, although e-cash ought to be the generic name for something that makes cleared funds immediately available of spending) should be a condition of a taxi licence and no passenger should be required to pay cash. And then taxi fares, just like air fares, would have to include the cost of a debit transaction. And then taxis would be allowed to surcharge for cash, cheques, cartons of Marlboro and jewellery.

Now, before anyone comments below by pointing out that I earn a living from advising, amongst others, stakeholders who earn money from card transactions – I know. Here are, for example, the most recent US figures.

Banks and credit card companies have a vested interest in convincing consumers to convert to going cashless. In 2011, credit card issuers reported $154.9 billion of revenue, according to the credit card advisory firm R.K. Hammer. A separate study from the same firm said that in 2011, fee income surpassed interest income for all issuers of cards (including credit, debit and prepaid cards). Though down from previous years due to new federal regulations, overdraft fees totaled $31.6 billion in 2011, research firm Moeb Services reported.

[From Going Cashless: What’s Good for Banks May Not Be Best for You – Knowledge@Wharton]

The reason I can be so sanguine about surcharging without, I hope, annoying important customers is because a) I like to think that integrity is part of the Consult Hyperion package and b) because I know that in the long run, they will still make money. Surcharging will shift behaviour in socially appropriate ways. When I book a business air ticket with my credit card that gives me tons of frequent flier miles, the airline will surcharge me more than they do now. When I book a cheap holiday flight with my debit card, they won’t surcharge me. Since the cost of the business air ticket is considerably more than the cost of the cheap holiday ticket, the surcharge on the former will cover the loss of the surcharge on the latter. But it’s right that the cost of my frequent flier miles falls on the business, if you see what I mean.

If I ruled the world, I would take two immediate actions: requiring banks to provide zero-interchange DLRPI and forbidding VAT-registered merchants to either refuse to accept DLRPI or to surcharge DLRPI payments. These actions would lead to a massive increase in debit card transactions (and therefore another significant fall in per transactions costs, thus shifting the crossover curve for debit/cash toward even lower transactions – more on this in another blog soon) and the benefits to society will far outweigh any increase in private costs. This should be the big picture for all of the stakeholders.

The keynote speech at the payments conference today came from Joseph Farrell, the director of the bureau of economics at the Federal Trade Commission. He talked at great length about the importance of lowering the transaction cost of payments, and the way that would benefit both consumers and society

[From The stranglehold of payments networks | Felix Salmon]

This is why an explicit target for the total social cost of payments should be central to the National Payments Plan here in the UK. Later this year, the European Central Bank is, I believe, going to publish the results of its detailed survey and calculation of the social cost of payments in European countries. This is important, because it will be the first time that harmonised methodology has been used to make social cost calculations that can be used to make comparisons between different. This would be a perfect time for the Payments Council to integrate a total social cost target into the plan.

These are personal opinions and should not be misunderstood as representing the opinions of 
Consult Hyperion or any of its clients or suppliers




  1. I’ve written before that the potential for pre-paid instruments is great, partly because the costs of pre-paid cards that run on the existing rails is too high.

    But this is a separate point. Again the goal of national policy should not be to minimise the costs to, for example, consumers if that loads unacceptable costs on to others. I think multiple zero-interchange three-party pre-paid schemes are a likely outcome.

  2. “Debit cards, and pre-paid cards, deliver the minimum social costs.”

    Most pre-paid cards impose significant costs on the cardholder. Or are cardholders not part of society or their costs not included in this equation?

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