By Mark Huffman
ConsumerAffairs.com
November 19, 2009
Consumers aren't the only ones who sometimes feel like they're being victimized by credit card companies. Lately, retailers have the same feeling.
While consumers pay higher and higher interest rates, retailers complain that interchange fees -- what they pay to credit card processors on consumer transactions -- are also going up at an increasing rate.
This week the Government Accountability Office (GAO), the watchdog arm of Congress, reported that credit card companies and their issuing banks profit significantly from interchange fees while merchants and consumers face escalating costs.
"The GAO report verifies what retailers, small and large, have been saying for years. Congress must act to reform this broken system and prevent credit card giants and their issuing banks from continuing to impose unjustifiable fees on retailers and their customers," said John Emling, senior vice president for government affairs at the Retail Industry Leaders Association.
Retailers claim fees have tripled
Interchange fees are imposed by credit card companies and issuing banks as a fee for processing credit and debit card transactions. However, RILA says these fees have tripled in the United States since 2001, to $48 billion in 2008, despite advances in technology that have reduced other comparable transactional costs. Today, for most retailers, the cost of processing paper checks is less than the cost of accepting credit and debit cards, the group said.
"Although issuers incur costs for offering cards, concerns remain about the extent to which interchange fee levels closely relate to the level of card program expenses or whether they are set high so as to increase issuer profits," the GAO said in its report. "In a competitive market, the price of the product and the cost of producing it would be closely aligned. However, producers with market power-such as monopolists or those offering goods not generally offered by others-have the ability to charge high, noncompetitive prices."
In 2008, Visa and MasterCard represented 71 percent of the credit card market and 88 percent of all interchange fees were collected by the top ten managing banks. The report also takes issue with credit card industry claims that interchange fees had not increased.
Caps on fees?
"Visa and MasterCard officials told us that their average effective interchange rates applied to transactions have remained fairly constant in recent years when transactions on debit cards, which have lower interchange fee rates, are included," the GAO said. However, our own analysis of Visa and MasterCard interchange rate schedules shows that the interchange rates for credit cards have been increasing and their structures have become more complex, as hundreds of different interchange fee rate categories for accepting credit cards now exist."
The GAO report suggests capping or limiting interchange fees would reduce fee costs most directly, and that it was reasonable to think these savings would be passed along to consumers. The report says that was the case in Australia, when that country took similar action.
"Yesterday's GAO Report moves the debate for meaningful interchange fee reform to a new level," Emling said. "By refuting the falsehoods and misrepresentations of reform opponents, this report was proof-positive that Congress must follow the lead of more than 30 other countries and reform an out of control system that harms merchants and consumers."
Congress debated legislation last year that would have applied new regulations to interchange fees, but it failed to pass.
