The Cost of Payments Interchange: Issues No One Talks About

Jim Van Dyke —  9 December 2009

James Van Dyke is President and Founder of Javelin Strategy and Research.

I feel that at least two important issues are being left out of the raging controversy over the cost of interchange. (At this point my readers are probably deciding if I’ll follow with a pro-merchant or pro-bank POV…but guess what: here comes one of each to make my point that we’re being a bit simplistic in this debate!).

Point one: card fees replace other costly forms of payments, and this must be included in any policy discussion. Previous Javelin research of several hundred merchants found that total costs for handling checks and cash are often considered to be as high as those for cards. Cash comes with risk of employee fraud, and may prevent consumer sales for those without current access to paper or cash money. Every check is an incident of fraud waiting to happen, as these antiquated IOU instuments are essentially dead or dying in every country other than the U.S. Checks invite criminals to follow the simple methods documented by Frank Abagnale of “Catch Me If You Can” fame.

Point two: Any discussion over cost of interchange should include a review of who pays for fraud. Between merchants and banks, if there is a disparity over who handles the brunt of fraud (the recent study we did for LexisNexis found that merchants incur 90% of direct fraud cost) brings up issues of incentives. Simply put, if you can pass a cost on to someone else your incentive for minimizing the cost may be reduced.

And now that I’ve said something to anger both merchants and bankers, I’ll eagerly await the responses…

4 responses to The Cost of Payments Interchange: Issues No One Talks About


    Javelin Strategy & Research does provide information on all costs related to payments, ranging from transaction fees to fraud costs. We recently provided groundbreaking merchant and bank fraud research in a project sponsored by LexisNexis, and LexisNexis clients may be able to obtain that study through the vendor at no cost by checking directly with them. Because we are a commercial research provider that deploys actual statistically-valid studies through highly-experienced experts (yeah, I know…this shouldn’t be unusual but it is) we must charge for the research. But I’ll post a couple of general trends herein. Alt payments can substantially cut the cost of merchant payments, but one should not assume this will always be the case nor should one assume that lower-cost methods will be successful. Revolution money recently gave up their solo efforts after leading with a low-cost message for merchants, allowing online stores to cut the typical online transaction costs of a couple points down to perhaps half in many cases. And yet another recently alt-payments winner in BillMeLater (recently purchased by PayPal) actually generally charged *higher* interchange, because they offered consumer incentives to drive more shopping volume. Thus Javelin’s conclusion that the cost factor is easy to overvalue in merchants’ total ROI calculation. On the cost of fraud, the study which we recently released through LexisNexis shows that out of a dollar of fraud that occurs at the point of purchase, the ratio between which businesses bear the cost is split some 90/10 between merchants and banks.


    I have the same question about the research on who bears the “direct fraud cost.” Is it possible to access somewhere? And what, by the way, is meant by “direct fraud cost”?


    Is Javelin’s research that you cite on the cost of alternative payment systems available, and if so, would you be willing to post links to it?

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