These fees do fund all the CC infrastructure (terminals, technology, cards, servers, chargebacks, fraud compensations) and the benefits that card issuers give to cardholders, but there's still a lot of space for profit. There's a strong lock-in as most merchants really, really want to accept cards instead of leaving the system, and little competition (the interchange is unified for all banks), so it's almost like a cartel where the prices go down only when/if forced by regulation.
> As for the retailers who point to lower swipe fees in Europe, Aufseeser counters that they are so low that “credit card companies are finding it tough to make any money at all” there.
Why should it be easy to make money? Ahh, right, because with the regulations they want, they can.
But in general it depends on the place - US has a strong legal difference between fraud on debit and credit cards, but there still is some fraud protection even for debit cards and in (for example) EU the consumer rights for debit cards also includes chargebacks for unauthorised transactions and compensation of losses with stolen/fraudulent credentials above a certain level (100 EUR if I recall correctly); and banks still require a lot of monitoring infrastructure and security people to reduce debit card fraud simply because customer satisfaction requires that the fraudsters don't run rampart.
Of course still room for profit but the above numbers show why merchants are interested in EU fees and security.
The reason is very simple: banks are established entities by the government. Banks have very complex, old, and unwieldy ways of doing business. There's a huge chunk of infrastructure feeding and maintaining the existing system: COBOL programs, call centers, technicians, offshore IT, and so forth. All of this was funded assuming that the current status quo would continue. Worse, nobody can really afford to replace all of that crap in-place. Some banks are lucky to get basic UI changes done to their website under any kind of cost control.
Usually, when some new way of doing business comes along, the new guys start from scratch. All their stuff is new and cheap. Customers get more cool stuff for way less money. But that's not how it is with banks. New guys are not allowed. They own the game.
So they're stuck, and we're stuck. Voters can get angrier and angrier and get more laws passed to "stick it to the bankers", but at the end of the day, unless you want to destroy your banking system? Customers have to eat any costs of change. Meanwhile all these neat startups around banking are paying out the ass and taking on huge risks just trying to tinker around the edges. This is what a non-competitive market looks like.
If you think about it, what PayPal accomplished was nothing short of a miracle. Kudos to those guys.