Interchange Fee Legislation – Who Will Pay the Price?

Interchange Fee Legislation interchange fee

This spring, U.S. Representatives Peter Welch (D-VT) and Bill Shuster (R-PA), introduced HR 2382, the Credit Card Interchange Fees Act of 2009.  Welch, the bill’s author, states that “credit card fees are killing small businesses.”  The act, targeted to help small retailers, would limit the fees charged to merchants.  It would also prohibit charging higher fees to merchants when customers use reward cards and would give the Federal Trade Commission the right to review interchange fees.

Merchants have been complaining for years about the cost of interchange fees and unnecessary profits the banks are earning.  Interchange fees are not regulated by the federal government, which in turn provides Visa, MasterCard and the issuing banks the right to raise fees for any reason.  Merchants and advocate groups claim that capping interchange fees would lower merchant costs and help prevent – or limit – bank profits from unnecessary fees.  For example, credit card companies and the banks that sponsor gas credit cards collect as much as 8 cents per gallon for interchange fees.  The Retail Industry Leaders Association said that last year “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.”

In 2008, U.S. merchants paid an average interchange rate of 1.82 percent per transaction, according to the Nilson Report, a Carpinteria, California-based newsletter that tracks the industry.  “A significant advantage of capping or limiting interchange fees would be that it would reduce interchange fee costs most directly,” the report said.  However, this type of legislation could create fees elsewhere in the cycle.

“U.S. card issuing banks receive an estimated $40 billion to $50 billion in income annually from interchange fees.”

A 2003 law to curb credit card fees in Australia was initially intended to lower costs for merchants – hopefully creating a more competitive pricing market.  The law has backfired a bit.  Australian consumers are seeing new costs associated with using a credit card.  Banks have added annual card fees, cut card perks and reduced rewards programs, like frequent-flier miles. The Australian central bank also allowed merchants to impose surcharges to card users.  Merchant fees for American Express and Diners’ Club were not affected because interchange fees are only related to Visa and MasterCard.  However, both card companies decided to reduce merchant fees to avoid losing customers to Visa and MasterCard.

Following the introduction of the Credit Card Interchange Fees Act, President Obama signed the Credit Card Accountability Responsibility and Disclosure Act of 2009, which directed the Government Accountability Office (GAO) to conduct a study of credit card interchange fees.  In November, the GAO released their report.  The GAO assessed four options to address merchants’ concerns:

  • Limit or cap interchange fees
  • Require the disclosure of interchange fees to consumers
  • Prohibit card networks and other entities from imposing rules on merchants that limit their ability to discriminate among the different types of cards, or levy a card surcharge
  • Allow merchants and issuers to directly negotiate interchange fees

The GAO determined that proposals to cut credit card merchant fees will be hard to implement.  The report did not conclude, however, if merchants were likely pass on any savings they obtained through lower fees to consumers or encourage consumers to decrease their use of higher rate cards.  They did conclude that disclosing interchange fees to consumers could be confusing and, of no surprise, interchange fees “account for the largest portion of the [merchant] fees for [the] acceptance of Visa and MasterCard credit cards.”

Congress is currently considering three bills that would regulate interchange.  If U.S. regulators put limits on fees or rates, the banks will find another way to generate revenue.  U.S. card issuing banks receive an estimated $40 billion to $50 billion in income annually from interchange fees.  The banks and card companies are obviously against any bill proposing fee and rate limits.  Reflecting on the aftermath of the new credit card rules in Australia, the U.S. Congress has the difficult task of deciding what to do.

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