Dumb (and Free) Interchange

Jan 27, 2022

When you use a credit card or debit card at a merchant, the money travels through a series of banks and processors in the card network. The fees paid to use the card network along the way are called interchange fees, and are set by the card network (e.g., Visa or Mastercard).

Interchange fees depend on how and where the card is being used. For example, the interchange fee in the U.S. ranges from about 1.3% to 3.5%.

I read an interesting post from an expert on payment networks titled, Interchange is going toward 0.. So what?. The dynamics of payment networks are really interesting – a much different side of the coin to the dumb pipe/intelligent networks of AWS is Not a Dumb Pipe. And Visa is adopting the 'dumb pipe' strategy (they call it 'network of networks').

In markets that highly regulated low interchange fees (e.g. Australia, India), network usage increased dramatically. And like the telcos, its difficult for Visa and Mastercard to compete in "over-the-top" applications. Some even threaten to created "closed loop" two-sided networks where they serve both the consumer and the merchant and don't require card networks (e.g., PayPal, Square Cash).

The dynamics also remind me of the idea of Too Cheap to Meter. Marginal cost of payments might be near 0 (risk management, fraud, etc.), but might still be able to be given away for free because aggregating demand is so valuable (financial products, software, float, etc.).