Maybe it seems like this doesn't have much to do with the Visa/MasterCard interchange battles in Brooklyn (still no decision on the interchange settlement) and Washington, D.C. (debit-fee cap on hold at 21 cents for now). The reality: It has everything to do with the U.S. fee fights. Regulators and judges are slowly carving away at Visa and MasterCard's fee structures, and that includes regularizing them so cross-border transactions won't carry a nasty surprise. In practice, that means a (very slow) race to the bottom for interchange fees.
It also means the card brands and banks are almost certainly looking for some more speculative ways to get a piece of retail transactions. Default interchange rates have been very good to Visa and MasterCard and a huge expense for retailers for the past few decades. And when credit became less attractive and debit cards—the original alternative payments scheme for retail—started coming on strong, the card brands started getting a piece of that action too.
But inexplicably, the Dodd-Frank financial reform act passed with the Durbin amendment attached, calling for a cap on debit fees. Now a federal judge in Washington has pulled the plug on the Federal Reserve's efforts to work around the terms of that cap. It looks very much like debit interchange is going to be a much smaller expense for retailers and a much smaller revenue line for banks and card brands.
There's no equivalent credit interchange cap in the U.S., but the legal can of worms that the big interchange settlement opened up may be worse for Visa and MasterCard. The card brands overreached in the interchange settlement. The response of big chains was to launch new lawsuits that directly challenge Visa and MasterCard on antitrust grounds, both in terms of their fee-setting structures and their corporate structures.
If any of those federal lawsuits succeeds in eliminating the card brands' default interchange rates, pure competition kicks in—and it's another race to the bottom.
Visa and MasterCard would much, much prefer to cut interchange rates through deals with regulators, the way they did in France. A big cut? Sure. But it's manageable. Actual competition is much harder to manage and makes card-brand income a lot more difficult to predict. But barring a lot of friendly judges and politicians, that's the direction that traditional interchange appears to be heading.
And with increasing efforts for cross-border caps, the ability to squeeze more from those transactions is likely to go away.
But if history is any guide, that doesn't mean any retailer can sit back with relief that the interchange line on the balance sheet is going to get smaller. This is Visa and MasterCard we're talking about. They've had to completely revamp their business models at least twice before. Each time they've found new ways to make even more money from merchants.
So don't get comfortable with that smaller interchange line in your books. Just to be on the safe side, better make room to add another expense line just for whatever Visa and MasterCard haven't told you about yet. You don't know what to label it, but you know where the money is eventually going to go.