Blowing the Lid Off Interchange Fees

Coalition welcomes hearing; NACS's Armour testifies

WASHINGTON -- The Merchants Payments Coalition (MPC)including the National Association of Convenience Stores (NACS)said it welcomed plans to hold a congressional hearing this week on secret fees totaling almost $40 billion annually that credit card companies charge to consumers each time a credit or debit card is used to make a purchase.

Consumers already know about a lot of the fees they're charged by credit card companies, said MPC Chairman Mallory Duncan, senior vice president and general counsel at the National Retail Federation (NRF). They know [image-nocss] about the interest they pay and the late charges and the over-limit charges and all the other fees credit card companies seem to charge just because they can. What they don't know is that credit card companies are charging them a secret checkout fee every time they use their cards. This hearing is going to help bring that secret fee into the spotlight and let consumers know just how much money credit card companies are taking out of their pockets behind their backs.

Credit card interchange fees are a top concern for U.S. convenience and petroleum retailers and a diverse coalition of merchants, said NACS President and CEO Henry O. Armour. There has not been nearly enough information and discussion about these fees in the past, so this hearing is an important step toward informing Congress and the public about the impact that high interchange rates have on U.S. consumers.

Interchange fees are levied in a market that is broken and something must be done to fix it, said Armour in his February 15 testimony before the House Energy & Commerce Committee's Subcommittee on Commerce, Trade & Consumer Protection.

This hearing is an important step toward informing Congress and the public about the impact that high interchange rates have on U.S. consumers, Armour said at the hearing on The Law & Economics of Interchange Fees. There has not been nearly enough information and discussion about these fees in the past, and we applaud you for your willingness to examine them, he said.

Visa and MasterCard have kept interchange fees largely secret for years, but the issue has emerged as a major public policy concern in the past year, said Armour. Last May, the Federal Reserve held a conference on the subject, and in September, the House passed legislationstill pending in the Senatethat would have required a Federal Trade Commission (FTC) investigation into interchange's role in rising gasoline prices. Additionally, more than 50 lawsuits have been filed in federal court claiming that interchange practices violate federal antitrust law.

NACS was invited to testify as a result of its testimony in September 2005 before the full Committee regarding gasoline prices and the increasing amount of money that credit card companies take out of every gallon of gasoline purchased.

Armour outlined four fundamental problems with the current interchange market: First, because of the market power of the card associations, retailers have no choice about whether they accept cards. Second, the card associations exploit their market power by driving up fees and by veiling these fees and their rules in secrecy. Third, these fees are bad for consumersparticularly some middle and many lower income consumers who do not have easy access to credit and debit cards. And fourth, consumers in the United States pay much more for interchange than other comparable countries.

Interchange, a secret fee of about 2% that is collectively set by Visa and MasterCard's member banks, is a percentage of each transactionsometimes accompanied by a flat feethat banks collect from retailers every time a credit or debit card is used to pay for a purchase. Interchange fees are meant to cover the cost of processing a credit card transaction and the risk taken by the issuing bank that the credit will not be repaid. Visa and MasterCard's non-negotiable contracts with merchants require that the fee be built into the advertised price of merchandise, forbid the fees from being shown on receipts, and effectively block cash discounts from being offered in most situations.

Visa and MasterCard together make up 90% of the U.S. credit and debit card business, according to NACS. Other credit card companies do not charge interchange as such because of differences in the way payments are handled, but nonetheless charge similar fees to process transactions. Visa and MasterCard alone collected $27.6 billion in interchange fees during 2004, while transaction fees charged by other credit card companies brought the total to $39.2 billion, according to MPC figures.

Consumers do not know about these hidden fees because the credit card companies go to great lengths to ensure that consumers remain in the dark about these fees, Armour said.It's not just consumers who are left in the dark; Visa and MasterCard refuse to fully disclose their operating rules to retailers. It is remarkable that they make retailers agree to abide by all of their operating rules in order to be able to accept their cards, yet they won't let retailers see those rules. I find the lack of transparency by Visa and MasterCard to be outrageous, he said.

Ultimately, consumers pay the price, he added. The average American family pays $331 in interchange and related fees every year, NACS said. And that is true whether that family uses credit or debit cards. Because these fees are hidden in the cost of virtually everything consumers buy, even cash-paying consumers ultimately pay for them.

This results in a nasty, regressive charge. Consumers with fewer resources whose credit does not allow them to have credit cards or do not have debit cards pay this fee like everyone elseas do consumers with credit cards who pay high interest rates, annual fees and have no rewards or miles programs. And this is the vast majority of consumers, Armour said.

U.S. consumers also pay among the highest interchange rates in the world, he said. We have the highest volume of transactions, the best technology and a very low rate of fraud. Yet U.S. rates are higher than in other countries and they are rising. Our interchange rates ought to be the lowest in the world.

The MPC was formed last year by trade associations representing retailers, restaurants, supermarkets, drug stores, convenience stores, gas stations, on-line merchants and other businesses that accept credit and debit cards and are concerned about the increasing interchange fees charged by banks and credit card companies to process credit and debit transactions. Coalition members include the American Petroleum Institute, the Food Marketing Institute, the International Association of Airport Duty-Free Stores, the National Association of Chain Drug Stores, the National Association of College Stores, NACS, the National Association of Theater Owners, the National Council of Chain Restaurants, the National Grocers Association, the National Restaurant Association, NRF, NATSO (the National Association of Travel Plazas & Truckstops), the Petroleum Marketers Association of America (PMAA), the Retail Industry Leaders Association and the Society of Independent Gasoline Marketers (SIGMA).