The GAO report resulted from a study ordered by Congress as part of the Credit Card Accountability, Responsibility & Disclosure Act reform bill signed into law in May. The study addressed issues such as disclosure of interchange fees to consumers, the extent to [image-nocss] which the fees drive up prices for consumers, the card industry's refusal to negotiate over the fees, how much money generated by the fees goes to marketing programs such as travel miles and ways in which card company contracts block merchants from giving discounts to customers who pay by cash.
The GAO said any regulation of interchange fees would suppose "challenges for implementation, such as determining at which rate to set, providing more information to consumers or addressing the interests of both large and small issuers and merchants in bargaining efforts."
The report said some consumers have benefited from competition in the credit-card market, and that merchants' benefits of accepting credit cards include increased sales and reduced labor costs. "A limit on interchange fees could affect merchants negatively if this option led to decreased overall retail sales or available credit," the GAO report said.
The GAO found that interchange rates have risen despite Visa and MasterCard claims that they have remained "fairly" constant, that interchange fees drive up prices for consumers, and that consumers could see lower prices if the fees were reduced.
(Click here for a fact sheet on the GAO report, "Rising Interchange Fees Have Increased Costs for Merchants, But Options for Reducing Fees Pose Challenges." Andclick here for the full, 64-page report.)
After Congress passed the law limiting increases in credit-card fees and interest rates to consumers, merchants initiated a campaign to curb the fees that retailers such as supermarkets and convenience stores pay to banks every time a customer uses a credit card, reported Reuters. Merchants contend the fees, which range from about 1.6% to 2.5%, unfairly cut into their margins and drive up prices for consumers. Financial services companies argue that the payments system is based on a pricing system that benefits businesses and their customers.
U.S. interchange fees rose to $48 billion last year from $42 billion in 2007 and were up 33% from 2006, but the GAO said that was because consumers used their cards more.
"Today's GAO report concludes that consumers could be harmed if Congress acts to lower what merchants pay to accept debit and credit," the Electronic Payments Coalition (EPC) said in a statement. "As the GAO noted in its report, merchants receive myriad benefits when they accept debit and credit cards, including increased sales and reduced labor costs. But giant retailers have been lobbying Congress to pay less than their fair share, and have their customers pay for these fees instead. The GAO's report leads to a clear conclusion: current interchange legislation places the needs of giant retailers over the needs of consumers. We urge members of Congress to protect the interests of their constituents and to oppose harmful interchange legislation.
But Mallory Duncan, senior vice president of the National Retail Federation (NRF), said in a statement that the report confirmed that interchange fees "drive up costs for consumers and are a cash cow for banks."
He also said, "This report shines a spotlight on credit-card fees and their cost to consumers. In the past two weeks, we've seen the Federal Reserve Bank of Kansas City hold a major conference on credit cards, a study from the Hispanic Institute on how card companies take from the poor and give to the rich and now this document. Clearly, there is a growing focus on this issue and it's time for action. With this information in hand, we hope Congress will move quickly to pass legislation to bring these fees and practices under control."
Visa and MasterCard rules effectively force merchants to pass the fees on to consumers by requiring them to be included in the advertised price of merchandise and making cash discounts difficult, NRF said. As a result, the average household paid an estimated $427 in higher prices last year, it added, up from $159 in 2001.
And Lyle Beckwith, senior vice president of government relations for the National Association of Convenience Stores (NACS), said in a statement, "The GAO confirmed key problems that we have raised about credit-card interchange fees, also known as 'swipe' fees. They found that the 10 largest banks have a stranglehold on this market, have used it to raise their fees, which all consumers pay and that small businesses and low-income, cash-paying consumers get the worst deal from this arrangement."
He added, "And though Visa and MasterCard claim that swipe fees have not been increasing, and that credit card use increases sales for merchants, the GAO report solidly debunks both of those claims. The GAO report should sound the alarm that it is time for Congress to reform swipe fees."
According to Beckwith, the report shows that the credit-card companies and their issuing banks mislead the public about their increasing rates and about the benefits of credit cards to businesses. The report also outlines an unfair, anti-competitive system that hurts Main Street businesses and their customers in order to pad the banks' bottom lines, with little relation to the actual costs of processing payments, he said.
The report makes it clear, he added, that unless Congress acts to bring competition and transparency into the interchange system, the big banks and credit card companies will keep lining their pockets at the expense of small businesses and consumers nationwide.
According to NACS, the report confirmed: Despite claims by Visa and MasterCard that they are not raising swipe fee rates, swipe fee rates have actually been increasing dramatically.
The near-monopoly market power of Visa and MasterCard means competition is unlikely to hold down swipe fee costs. Artificially high swipe fees increase costs for consumers and hurt those consumers without credit cards the most. Despite claims by Visa and MasterCard that their products increase sales, even their own data doesn't support that claim, and costs to merchants are outpacing any sales increases. Swipe fees are a cash cow for the credit card companies and banks, not a reflection of their processing costs.
(Click here for previous CSP Daily News coverage of the interchange fee issue.)
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