Mechanism
Why US interchange stays high even when merchants hate it
Most people think this is just regulatory capture—that US banks are better lobbyists than European ones. But the actual mechanism is subtler and more interesting.
The EU's 2015 interchange cap (0.3% for credit, 0.05% for debit) was binding partly because the market structure already made it defensible. Card networks in Europe had weaker competitive positioning. Visa and Mastercard couldn't credibly threaten to exit or degrade service because consumer switching costs to other payment rails were lower, and merchants had more negotiating leverage. When the cap hit, volumes held, fraud stayed manageable, and the networks adjusted through volume growth rather than price.
In the US, the situation is genuinely different in ways that make a similar cap harder to implement. Merchant concentration is higher—Walmart and Amazon have real leverage, sure—but consumer card adoption is more entrenched. Visa and Mastercard run most of the deposit base's rewards infrastructure. A hard interchange cap here would mean banks actually cutting card rewards or raising annual fees (which happened slightly post-Dodd-Frank's debit cap, though not dramatically). That's politically toxic in a way Europe didn't face, because US voters have absorbed the idea that they deserve 2% cash back as a birthright.
The surcharge threat you mention is real but tells you something important: it never stuck. Why? Because networks contractually prohibit prominent signage of surcharges, and tests showed customers hate knowing the true cost. Merchants grumble but don't want to bear the customer alienation. It's a classic commitment problem—everyone would be better off with lower interchange, but individually, no merchant can afford to be the one that advertises it.
So I'd be skeptical that regulatory will alone explains the gap. You'd need either a politically durable cap with enforcement (hard), or a competing network that's genuinely cheaper (harder than it sounds). The EU did the former. The US has tried the latter for decades with minimal traction.
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What's your read on whether the debit cap actually teaches us anything useful here? Dodd-Frank capped debit interchange at 21-24 cents, and yes, rewards didn't crater the way banks threatened, but volume also flatlined for years and issuer margins compressed enough that smaller banks basically exited the market. Seems like the political cost just got paid through consolidation rather than through visible fee increases—which is maybe worse for actual merchant competition.
And on the consumer entrenchment point: are you saying a credit interchange cap would fail because voters wouldn't tolerate the reward cuts, or that it would *succeed* but only by inflicting those cuts and we've decided that's politically unacceptable? Because those are different problems. One is about feasibility, the other about whether we should want it even if we could do it.
The EU comparison flatters the structural argument a bit too much. Japan capped interchange in the late 90s—0.5% on credit, even more aggressive than the EU eventually went—and Visa/Mastercard didn't exit or degrade service meaningfully. Consumer switching costs there were *higher* than in Europe, not lower. Card adoption was less entrenched than the US, sure, but the networks adjusted through exactly the mechanism you describe: volume growth, merchant fee restructuring, tighter margins. No political martyrdom about rewards programs either.
The difference with the US isn't really that a cap would be unenforceable or that the market structure is uniquely resistant. It's that we've never actually tried one with teeth. Dodd-Frank's debit cap worked (interchange on debit actually fell), but it was narrow and preceded the rewards infrastructure buildout you mention. A real credit card cap would face political resistance, absolutely—but that's a different claim than "the market structure makes it impossible." Japan's market structure was also resistant in principle. They just did it anyway.
I taught high school econ for six years before moving into research, and I remember this exact problem showing up in how students understood markets. They'd see "merchants hate this" and assume the solution was obvious: regulate it. But they were missing the demand side entirely.
The rewards piece is real and I think often underweighted in these discussions. I've watched the shift from 2000 to now—cash back went from a luxury to an expectation to something people actively calculate into their spending. That's not just marketing. It's actually changed consumer behavior in ways that are now locked in. You can't cap interchange without someone eating the cost, and banks aren't going to eat it if it means killing rewards. They'll just raise annual fees on premium cards (already happening) and watch lower-income customers get priced out of the ecosystem entirely. Then you get political blowback from a different direction.
The EU comparison only works if you assume the political economy is comparable, and it's not. Europe had a different banking structure, lower card saturation to begin with, and didn't have this 20-year runway where rewards became culturally embedded. By the time they capped interchange, cards were already mature. Here we're still in growth mode, and the networks have structural leverage that's hard to break without something actually better replacing them. A cap that works in Europe might just hollow out the US system in ways we don't fully anticipate.