Your free debit card is not free

I’m between rental flats in London and chose to rent a cottage in Essex for two weeks. I found it on Airbnb and paid the landlord ca £1000 for that. Crazy prices around London.

The landlord got most of it, Airbnb got a good margin, but I was fascinated to pay £2 to my bank as a hidden fee on my debit card. It doesn’t show up anywhere on my card statement, but this is what Airbnb had to pay to the bank that issued my card in what is known as an interchange fee.

Interchange is a malaise

Interchange is a curious phenomenon – an arrangement that renders the magic of free-market competition limp and powerless. It is a 3-way agreement between the issuing bank (e.g HSBC), the card scheme (e.g. Visa) and the merchant (e.g. Amazon) – that a percentage of the transaction fee should be paid to the issuer. In practice it is really only an agreement between the card scheme and issuing banks. The monopolistic position of Visa and Mastercard leaves the merchant without any say – they either pay up or lose the ability to sell to these card holders.

Most card holders are oblivious of such a fee, but merchants are painfully aware of it. To the extent that where they can – they will avoid taking more expensive card schemes, such as American Express.

There were £520bn in debit card payments in the UK in 2016. Banks earned at least 0.2% on that volume in these interchange fees. It is a small percentage when you’re buying a coffee, but adds up to a handsome £1.04bn annual fee revenue to UK banks.

UK: “card holders aren’t paying their banks enough”

That’s what Visa must have thought when they decided to remove the 50p cap in September 2016. Previously the interchange on larger amounts, such as my cottage rent was capped at 50 pence, on consideration that there is no logic on the bank getting paid more on larger payments than smaller ones, given their cost structure is transaction based.

How do the regulators allow this?

There is zero incentive for the banks and card schemes to lower interchange. That’s why we see regulators stepping in. Without regulators we’d be still paying 3% as was common in the 90s. Many regulators have noticed that banks are getting paid enough already.

Spain

The Spanish have capped the interchange at 7 cents. Yes, your Spanish bank is getting no more than €0.07 when you buy coffee or book your flights with your debit card. I’m sure that is plenty to cover the cost of electricity, internet and the upfront cost of servers and software.

The Netherlands

Dutch, the inventors of modern digital banking with ING, have figured it doesn’t really take 7 cents to process a transaction, so they have capped it at €0.02.

Ireland

Irish didn’t just take the EU level caps as given and thought about it independently. They have interchange at 0.1% and capped at €0.50.

United States

US has tried hard to create competition and it hasn’t been easy. For example, they require each card to work on two schemes, usually one is Mastercard or Visa and the other one a small player no-one has heard of.

They have also limited the amount that can be charged as interchange with debit cards.

An issuer […] may not receive an interchange fee that exceeds 21 cents plus 0.05 percent multiplied by the value of the transaction, plus a 1-cent fraud-prevention adjustment.

EU

The interchange fees used to be the wild west in  Europe until the Interchange Regulation 2015 came into force and capped the debit card to 0.20% and credit card interchange to 0.30%

Is there a solution?

Not yet. In the longer term there has to be a way to create competition between card schemes and incentivise alternative more secure payment options to emerge. Until then we can only hope to follow the example of the Spanish and Dutch to use the force of regulators setting the interchange fees.

Namibia: the African ranch

On the second attempt we succeed in crossing the Namibian border and have agreed to stop a few km outside the border town. While in Angola it was at times hard to find a bar-shed or a cafe-shed, now the problem was opposite. In every village of 10 sheds, 8 of those sheds were bars with cute names.

The first impression couldn’t have been more wrong. 100 km into the country the bars disappear and are replaced by long straight roads with perfect tarmac, bordered by endless fences. Namibia could be mistaken for an African Bundesland or a German version of Arizona. The Ordnung is everywhere. Having been through the chaos of Nigeria, Congo and the places inbetween, the western-like orderliness of everything in Namibia was unexpected. (more…)

Angola: less dance more work

Once the crazy Lagos-like traffic of Luanda clears, the road going south is good tarmac and 50km out you can hardly see any other cars on the road, just endless straight lines through much less vegetation than the north. The scenery changed quickly, the steaming rainforests of Gabon gave way to patches of savannah in Congo and now the plains of angola remind of southern Spain. (more…)

Angola: back in the USSR

The ramp in front of me is steep. Marat from Tatarstan already calls davai, davai. So I go up fast enough to warrant a little jump off the end of the ramp landing into an Antonov 12 military cargo plane. It is a four-prop classic, built some time between ’59 and ’73. It is also our ride out of the Angolan enclave of Cabinda, courtesy of Angolan military and 250 USD. (more…)

Congo: fixing the Austrian

I open the throttle, but the thump of the 640cc cylinder doesn’t save me. The bike skids into the mud. I pick up the bike, kickstart and try to get going, but the rear wheel spins and Kotilda doesn’t move more than an inch. I try pulling back and it moves an inch, no more. The reason I crashed wasn’t just my incompetence – my front wheel is stuck. (more…)

Gabon: arbeit is for others

The time spent in the workshop with Deleure, my favourite South African mechanic, presented an opportunity to learn about life in Gabon. Deleure had moved here for work. Salaries in Gabon are 3 times what they are back home for him. His workshop was surrounded by million dollar superboats, jetskis, quads. I quizzed, who are the rich folks in Gabon? Apparently 90% of GDP is controlled by 20% of the population. He explained it is mostly the Lebanese, who own the mines inland and have some stake in oil production.
(more…)

Libreville: aluminium is weak

Eleven months have passed, but Africa didn’t miss us. It is the same hustle and bustle, as if we just woke up another day. The roadwork that last time we thought was just paused for the weekend was still in exactly the same state. The arrival reminded that the brain remembers selectively and romanticises the past. The heat. There was no recollection of the unrelenting humid heat that doesn’t stop in the night. I fail to comprehend how do they bother to wake up in Congo and for years go shooting at each other in this sauna, rather than find a shady mango tree and tough out the heat.
(more…)