The high cost of your low-tech credit card
May 04, 2011
A recent analysis in the Christian Science Monitor (CSM) found that American businesses pay more to process credit card purchases than those in other countries. In some cases, such as when you compare a $50 purchase at a supermarket in the U.S. to a supermarket in Australia, the interchange rate is nearly five times higher in America.
The simple explanation for the disparity is that most other countries in the world use microchip-embedded credit cards that carry a customer's financial data on a computer chip and require the customer to key in a personal identification number for every purchase.
Although Wells Fargo and JPMorgan Chase recently announced plans to introduce a microchip card to some of their customers, the U.S. marketplace is overwhelmingly dominated by magnetic stripe credit cards. These old-fashioned cards, which have been around for 50 years, are "swiped" at a point of purchase, and each time they are used, the credit card companies charge merchants a "swipe" or interchange fee.
So why are American merchants--and their customers, assuming the prices they pay are determined in part by the amount the store has to pay the credit card company in swipe fees--paying so much more for the privilege of using a credit card?
Paying more for less
One conclusion the CSM analysis reached was that swipe fees are higher in the U.S. because magnetic stripe credit cards have such a higher fraud risk than the microchip cards. Credit card companies lose an estimated $8.6 billion in fraud each year from stolen or lost credit cards, and those losses are recovered from customers through fees, interest and late payment penalties. According to Security News Daily, thieves can use a cassette tape record to make a copy of the sensitive financial information embedded on a magnetic stripe card.
But the so-called EMV cards--named for Europay, Mastercard and Visa, the three card companies that rolled out the microchip technology in 1999 as a way of standardizing payments--are much more secure. A study by Aite Group LLC, a Boston-based research firm, concluded earlier this year that chip card technology would significantly help mitigate those fraud losses.
It certainly helps in Europe, where swipe fees seem to be determined in large part by fraud risk, CSM said. France, for instance, gives its lowest interchange fee to the microchip credit cards.
Is the U.S. behind on the times?
So why aren't credit card companies in the U.S. joining the rest of world in deploying the EMV cards? Some merchants, including Wal-Mart, say they are eager to have the chip-and-PIN cards, but issuers are dragging their feet because, Wal-Mart claims, they don't want to lose the revenue from interchange fees.
The argument that it would take too long and cost too much to change over point-of-sale terminals to EMV technology from magnetic stripe technology doesn't hold much water; Wal-Mart says their payment terminals are ready for the new technology. Other retailers are holding off on investing in microchip technology until card companies move ahead with the technology.
In addition to having large retailers like Wal-Mart squawking, two other things could convince card companies to move forward to EMV technology: demands from customers and/or a cap on interchange fees, such as those that have been proposed on debit card transactions. Swipe fees on debit cards are expected to be reduced significantly by the Federal Reserve this summer.
As it is, the two U.S. banks rolling out the EMV cards are targeting their customers who travel frequently to Europe and other parts of the world. Increasingly, those travelers are finding that they can't buy things with their old magnetic stripe credit cards. If that keeps happening, and credit cards keep losing the revenue from rejected European purchases, they may be convinced to join the rest of the world with EMV technology.