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Will reducing merchant card fees help or hurt consumers?

Legislation debates whether 'interchange fees' should be reduced

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Will reducing merchant fees help or hurt consumers

The ability to swipe your credit or debit card to make a purchase can be a tremendous convenience, but that convenience comes at a cost -- and that cost is now in the middle of a congressional debate.

Every time you pay by credit or debit card, what are known as interchange fees -- approximately 1 percent to 3 percent of the total cost of your purchase -- go to the card-issuing bank and the merchant's bank for facilitating the transaction. While legislation that would limit those fees is currently making its way both on the national and state levels, both advocates and opponents say consumers could end up on the losing end of the battle.

At the heart of the debate is the true cost of paying electronically -- and who will pay. According to the Electronic Payments Coalition, a trade group that represents credit unions, banks and payment card networks such as MasterCard Worldwide and Visa, interchange fees are necessary to maintain the payment transaction system and to protect the banks from the risk they assume in day-to-day transactions. Since the retailer receives his money immediately, and a consumer might not pay the credit card bill for 30 days, "the interchange revenue is also what compensates the bank for the float on the funds," says Trish Wexler, a spokeswoman for the Electronic Payments Coalition.

But "interchange costs have gone up dramatically over the past several years, and it's costing our retailers and their customers billions of dollars," says J. Craig Shearman, vice president for government affairs for the Washington, D.C.-based National Retail Federation.

In 2008, Americans paid $48 billion in interchange fees -- up from $42 billion in 2007.

The legislative fight
Retailers have long sought more control over interchange fees, and a number of legislative efforts reflect that. Most eyes right now are on the Durbin Amendment, introduced by U.S. Sen. Richard J. Durbin, D-Ill., and added to the Restoring American Financial Stability Act, financial reform legislation that the Senate passed in May. If the Durbin Amendment makes it to the final financial reform bill, which will be a compromise between the House and Senate versions, interchange would be impacted in the following ways:
  • The Federal Reserve would set limits for interchange fees on debit cards.
  • Retailers would be allowed to require customers to spend a minimum amount, such as $10, in order to pay by credit.
  • Retailers would be allowed to offer customers discounts for paying by certain methods, such as cash, check or debit card. Visa and MasterCard contracts currently allow merchants to offer these discounts, but Durbin's amendment would make it a federal law to do.

Other national legislative efforts include Durbin's Credit Card Fair Fee Act, which would let merchants negotiate with banks over the cost of interchange fees, and the Credit Card Interchange Fees Act of 2009, introduced by Rep. Peter Welch, D-Vt., which would give the Federal Trade Commission authority to limit fees.

All consumers, even those who pay with cash and checks, pay more at the store and more at the pump because these interchange fees are passed on in the overall cost of goods sold.

-- Ed Mierzwinski
U.S. PIRG

On the state level, Vermont in May became the first state to approve a law that lets retailers set minimum spending levels of up to $10 for using credit, and allow merchants to offer discounts for cash and refuse to accept credit cards in some locations. Vermont Gov. Jim Douglas refused to sign the bill, saying interchange should be handled at the national level, but he allowed it to become law without his signature.

A help or hindrance
While it's easy to see why retailers would be in favor of limiting interchange fees and banks would not, the impact on consumers is harder to gauge.

In testimony last year before the House Financial Services Committee, Ed Mierzwinski, consumer program director for U.S. PIRG, a national public interest group, said, "All consumers, even those who pay with cash and checks, pay more at the store and more at the pump because these interchange fees are passed on in the overall cost of goods sold." As a result, Mierzwinski supports interchange reform, since it could lead to lower prices across the board.

Retailers also say the ability to set minimum spending requirements for credit purchases is crucial because they often lose money on small transactions since interchange fees can eliminate their profit margin entirely. If they didn't suffer that loss, they could keep prices down.

I don't carry cash around, and I think it's just the cost of doing business that retailers should have to pay 2 or 3 percent to be able to do business with me even for a small purchase.

-- Shanda Hill
Film student

Finally, the ability to offer customers a discount for paying by cash or check would provide consumers with a direct benefit, supporters say. "If you come in and buy a $1 bottle of water, maybe you can get it for 95 cents," says Shearman.

Those opposing the legislation say the last thing consumers will see is more money in their pockets. 

A May 2010 report the financial research firm Celent concludes "Presumably, the idea behind the amendment is that consumers would enefit from lower prices, as the merchants pass the reduction in their fees to their customers. Realistically, it is a long shot."

Because lenders would lose out on interchange revenue, they'd have to make that money back some other way, and that would likely cost their customers, says Fred R. Becker Jr., president of the National Association of Federal Credit Unions. For example, consumers could expect to see a rise in loan fees, as well as a reduction in the interest rate they get on deposits, Becker says. 

The legislation would also cut down on convenience. "It forces us to carry around cash with us or to spend more than we want to so we can meet that minimum payment requirement," says Wexler. "So is it a ploy by retailers to try to get consumers to spend more by reaching that minimum?"

Shanda Hill, a 33-year-old film student in San Francisco, agrees. "I don't carry cash around, and I think it's just the cost of doing business that retailers should have to pay 2 or 3 percent to be able to do business with me, even for a small purchase," she says.

Those who oppose the legislation also point out that many retailers would likely not pass on interchange savings to consumers anyway, since those fees are hidden and built into the cost of products.

A report in 2009 by the U.S. Government Accountability Office found that when interchange fees were lowered in Australia in 2003, there was no conclusive evidence that prices declined. However, credit card issuers did reduce rewards and raise annual fees as a way to recoup their losses.

Jonathan Nowling, owner of Rock Hill Lavender, a bath and body care products store in Roseville, Calif., admits that he probably would not lower prices since he's already losing money on some products due of interchange fees. However, with limits to interchange fees, "we would get more revenue, which would allow us to be able to get more inventory and be able to grow as a company," he says.

While the outcomes of most of these legislative efforts remain to be seen, there's one thing all sides agree with. "If merchants don't pay for the cost of doing business, someone has to pay for it," says Wexler.

See related: Wall Street reform bill taking shape for consumers, Ad campaign fights credit card interchange fees, Interactive: How credit card transactions work

Published: June 3, 2010


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