Legal, Regulatory, and Privacy Issues

GAO: Government pays massive credit card fees, too


Just like gas station owners and other merchants, the federal government pays interchange fees for credit card and debit card transactions — and its bill is huge, says a new GAO report.

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Gas station owners and other merchants aren’t the only ones getting hit with interchange fees for credit card and debit card transactions. In a report released today, the U.S. Government Accountability Office (GAO) reports federal agencies processed more than $27 billion in card purchases during fiscal year 2007. During that time, federal coffers doled out $433 million in “merchant discount fees,” which include interchange fees.

The U.S. government pays huge interchange fees, report says.The GAO report was cited during today’s U.S. House Judiciary Committee hearing on the proposed Credit Card Fair Fee Act of 2008. The bill seeks to amend anti-trust laws to allow a three-judge panel to set interchange rates. Critics have called the measure an effort at price control that may have little chance of passage.

Convenience store and gas station owners have complained for years about the fees and battled in court with credit card networks Visa and MasterCard to reduce them. Now that gas prices are on the rise, gas station owners are clamoring louder for reform because they say the fees are guzzling up their profits. Every time you pull a credit card from your wallet to pay for gasoline, the station owner pays an interchange fee of 1 percent to 2 percent of the purchase price depending on the type of card used.

“I’m not anti-plastic. I do recognize that they provide benefits,” Thomas Robinson told judiciary committee members. Robinson is vice president of regulation for the National Association of Convenience Stores, a national trade group whose membership is comprised of gas station owners. He said the group is most concerned that interchange rates may be driving gas stations out of business.

Officials in Australia , Israel and Mexico have moved to limit interchange rates, but the GAO notes that there isn’t enough evidence to show whether those measures resulted in lower costs for consumers (in order words, that merchants who enjoyed lower interchange rates passed those savings on to paying customers).

Convenient payment methods
The federal government uses credit cards both in receiving payments (IRS tax payments, for instance) as well as buying goods and services using government-issued credit cards. The government generally pays lower interchange fees than gas station owners and other merchants.

The American Bankers Association issued a statement saying, “Just like merchants all across the country, federal entities that accept credit and debit cards experience more satisfied customers, guaranteed payment, fewer losses from bad checks and cash thefts and improved operational efficiency.  It is a system that works and works well.”

According to the GAO: “For example, as of April 2008, if transactions met all applicable processing requirements, government entities accepting a MasterCard consumer credit card as payment would pay an interchange fee of 1.55 percent of the transaction amount plus $0.10, and if accepting a Visa consumer credit card, an interchange fee of 1.43 percent of the transaction amount plus $0.0534 (In comparison, the interchange rate applicable to a MasterCard general purpose consumer credit card transaction at some fast food stores is 1.90 percent.)”

Costs up, although rate is the same
As one person who testified at the judiciary committee hearing noted, although the interchange rates have remained relatively constant over the past decade, the amount that federal agencies and other merchants are paying has increased because the volume of electronic payments has increased. The GAO says card payments increased by 51 percent between 1999 and 2007.

The GAO says electronic payments are expected to increase even more in the coming years. The report recommends federal financial managers work to maximize the benefits of using credit and debit cards while minimizing the costs associated with interchange fees.

See related: “Interchange fees for credit card transactions

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