…Running two transactions per purchase poses several potential problems for merchants, says Julian Morris, a senior scholar with the ICLE and author of the report.
…“Running two transactions increases the time it takes to complete a transaction in general,” Morris says. He adds that the friction from running two transactions would be especially harmful to high-throughput merchants, such as quick-serve restaurants.
…As card issuers see less interchange revenue on transactions in Illinois, it is likely they will compensate by reducing rewards and other benefits, work with card networks to boost interchange to recover lost revenues, or do both, the report argues. “In other words, states that prohibit the collection of interchange fees on taxes will create a significant negative externality for consumers and/or merchants in other states,” notes Morris in the report.
…Another potential problem for merchants is that those paying a blended rate set nationally would likely not see any reduction in their merchant discount rate, Morris argues.
“Merchants who use a gateway, such as Stripe or Square, currently pay a blended merchant discount rate that is set nationally, and would therefore not see any MDR [merchant discount rate] reduction. It seems likely that most other acquirers who offer blended MDRs would not reduce their rates either, as they would incur additional costs associated with implementing the interchange-fee carveout, which would be passed through to their merchant customers. Indeed, it is possible that the implementation costs to acquirers would be sufficient that they would increase their blended MDR,” Morris writes.
In addition, merchants paying “interchange plus” would also likely see an increase in the “plus component” of their MDR to cover the acquirer’s cost of complying with the law, the report says.
“Illinois legislators really did not think this law through,” Morris says. “Passing this law in Illinois is bad. Doing it in multiple states would be worse.”
Julian Morris on State Interchange Fee Legislation
Digital Transactions
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ICLE Senior Scholar Julian Morris was quoted by Digital Transactions in a story about a recent ICLE white paper on state-level rules on interchange fees. You can read the full piece here.
If the Illinois Interchange Fee Prohibition Act survives the legal challenges it faces, the law would “create significant market distortions,” says a recent report from the International Center for Law & Economics, a Portland, Ore.-based nonprofit research and policy center.