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House Studies Credit Card Fees

By Martin H. Bosworth
ConsumerAffairs.com

July 20, 2007

Ed Mierzwinski, head of the U.S. Public Interest Research Group (PIRG), called interchange fees "hidden fees" that subsidize the "deceptive and anticompetitive" practices of the credit card industry.

"These fees impose the greatest hardship on the most vulnerable consumers – the millions of American consumers without credit cards or banking relationships," Mierzwinski said in his testimony. "These consumers basically subsidize credit card usage by paying inflated prices – prices inflated by the billions of dollars of anticompetitive interchange fees."

On the other hand, National Bank of Scotia president John Buhrmaster testified that interchange fees were a "cost of doing business," designed to subsidize services banks and lenders offer consumers.

"In all likelihood, without the incentive of interchange, community banks like mine would not be able to offer the same services we do now, which means fewer choices for consumers and less competition for their business," he said.

Committee chairman John Conyers (D-MI) wanted clear proof that interchange fees weren't harmful to consumers and businesses.

"While I come into the hearing with an open mind, I do believe the burden of proof lies with the credit card companies to reassure Congress that increasing interchange fees are not harming merchants and ultimately consumers," he said.

"Kept In The Dark"

Merchants and retailers have challenged the financial industry over interchange fees, stating that as banks encourage customers to pay for small purchases with plastic rather than cash, the resultant cost of the transaction wipes out any profit they may make.

Retailers claim they are forced to raise prices on all goods to compensate, which harms customers who don't pay for goods with plastic.

The committee also heard testimony that Visa, MasterCard, and the banking industry have partnered to ensure prices stay high, and their collective market power forces retailers to play by their terms or go out of business.

National Retail Federation senior vice-president Mallory Duncan testified that, "By a very conservative estimate, Visa and MasterCard together control more than eighty percent of the credit card market. The vast majority of merchants therefore have no choice but to accept their cards."

Duncan testified that consumers were being "fleeced" and "kept in the dark" as to how much interchange fees actually profited credit card companies -- and how much it cost consumers and merchants to support them.

"The card associations make every effort to ensure that card holders remain unaware of the interchange fee costs their usage of cards imposes...Consumers then assume that using a card is free (or even a benefit because they get some type of “reward”) even though it makes all of us pay more for virtually everything we buy."

Shifting The Risk

Several retail and merchant associations banded together to sue Visa and MasterCard over the interchange fees, which led to increased media scrutiny of the issue and Senate hearings on "credit card price-fixing" held in 2005.

It also led to MasterCard's initial public offering on the stock market, much of which was going to be used to build up a "war chest" to pay for the costs of litigation against the merchant lawsuits. MasterCard estimated it would need as much as $650 million from the IPO to defray the costs of the lawsuits.

Not to be outdone, Visa recently announced the plan for its own IPO, which would set up a legal defense fund for the merchant lawsuits.

Retailer Mitch Goldstone, one of the principals in the merchant lawsuit, blasted Visa for attempting to shift its "potentially heavy legal costs" to shareholders and stakeholders in order to reduce liability.

"Just as with MasterCard, Visa too can try to pawn off its legal liabilities onto others, but its prior alleged antitrust violations and legal obligations do not evaporate by selling shares to the public," Goldstone wrote on his blog.

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