Interchange fee changes coming, and what that means for consumers

Cash payers had been subsidizing card users, but that system's under fire

Question for the expert Dear New Frugal You,
It has come to my attention that my husband and I are considered to be "freeloaders" because we pay off our credit card balances ASAP.  It's my understanding that retailers pay a fee for accepting credit cards and that fee is built into the price of everything we buy, no matter how we pay for it. How is it, pray tell, that we are getting anything for free? -- Anne P.

Answer for the expert

Dear Anne,
Anne, you're absolutely right. You are paying for the privilege of using a credit card at the cash register. But you may be getting help from customers who pay cash at that same register. To understand how this works, let's examine the world of merchant accounts.

In its simplest form, a merchant account is an agreement between a business and a bank. It regulates how the business can accept credit and debit cards and how much they will be charged by the bank in monthly and transaction fees.

The biggest part of the fees are called interchange fees. The fees are charged to the business each time you swipe your credit or debit card. In fact, they're sometimes referred to as "swipe fees."

Stores pay the credit card company between 2 percent and 5 percent for each transaction processed. A no-frills card might charge 2 percent. A rewards card could charge as much as 5 percent. Merchants paid about $48 billion in such fees in 2008.

Businesses naturally add in the cost of processing credit cards into all of their prices. Both cash and credit customers paid the higher prices.

In another part of the contract they signed, businesses agreed not to offer cash discounts or tell customers how much the stores paid when credit cards were used.

Busnesses grumbled about the restrictions and the fees for years, but in 2009 and 2010, the dispute escalated. The U.S. Dept. of Justice sued American Express, MasterCard and  Visa, claiming that the prohibitions were illegal. In October 2010, the department settled with Visa and MasterCard, which will drop the prohibitions. American Express refused to settle and may take the suit to trial.

Another challenge to credit card companies is H.R. 2382: Credit Card Interchange Fees Act of 2009. The bill would limit the amount that banks could charge for swipe fees. It has not been voted on by either house of Congress and has sat dormant for the last year.

The banks claim that these fees are necessary to pay their cost of processing the transactions and to offer credit to consumers.

Remember that the bank pays the merchant immediately. But you don't pay for credit card charges until you receive the bill and send in a check (or make online payment). There could be a full month before the bank gets paid. During that month the bank has to cover the cost of that money.

Quick math tells us that the fees are profitable for banks. Charging stores 2 percent to loan you money for 30 days or less works out to 24 percent or more annually. That's a rate that anyone short of a loan shark would appreciate!

Banks say that there are other costs that the interchange fees need to cover. Those costs include transaction processing, the costs of rewards programs and the risk that consumers will refuse to pay.

If interchange fees are capped by law, expect banks to reduce rewards and increase annual fees and interest rates. They will want to maintain their profitability. It's an open debate whether stores will lower their prices.

So, Ellen, you're right. You have been paying for the privilege of using a credit card. But, at least in the past, you were benefiting from cash-paying customers who paid the same price that you did.

Does that make you a freeloader? Hardly. Just another consumer living in a financial world that gets more complicated every year.

See related: How credit card charge-offs affect you, Will reducing merchant card fees will help or hurt consumers?, Video: How credit cards are processed

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Updated: 01-20-2018