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August 25, 2008 • Issue 08:08:02

Senate committee brings interchange to account

Members of the U.S. Senate Small Business and Entrepreneurship Committee requested in a July 30, 2008, letter that the Government Accountability Office investigate the structure of credit card interchange fees.

Sens. Tom Harkin, D-Iowa, Olympia J. Snowe, R-Maine, and Benjamin L. Cardin, D-Md., asked the GAO to take a balanced look at whether fees are properly disclosed, how they are set, and the level of competition in the marketplace.

"Interchange fees constitute significant surcharges which are passed on to businesses and consumers," Cardin said.

"We need a balanced review to determine if merchants have appropriate bargaining power to negotiate fair and reasonable rates with companies like Visa and MasterCard, who control the majority of the market. Greater transparency, negotiation, and competition can only be of help to the credit and debit payment system."

In the letter, Harken added, "This multi-billion dollar fee is blamed for higher grocery prices and credited for subsidizing popular cash-back and rewards cards.

"A GAO study will help us to gather unbiased information on these fees so that we can help the average consumers who are in the middle of this tug of war. I trust the GAO to honestly and comprehensively study this issue and advise us on a fair way forward."

Snowe commented that small business merchants complain that interchange fees are too high, not set competitively and eat into already slim profit margins. In addition, the SBEC asked the GAO to provide options and recommendations to federal regulators on the interchange rate structure and how small merchants can better negotiate interchange fees.

Two-sided coin?

Arguments for and against interchange abound. Credit card companies contend that consumers and businesses receive great benefits from the current system.

However, merchants are concerned that card networks are pushing the cost of credit card incentives and rewards programs onto businesses and consumers through interchange fees.

In an effort to examine both sides of the matter, the senators requested clarification from the GAO concerning the complexities of interchange.

The following questions were asked:

  • Under existing U.S. laws, to what extent are interchange fees required to be disclosed to consumers and merchants, and how are these disclosures overseen by federal banking or other regulators?
  • What is the level of competition in the interchange fee market?
  • What options do small merchants have to reduce the cost associated with payment card acceptance?

Fed impact at forefront?

In May 2008, the SBEC asked the GAO to examine the benefits and costs associated with federal entities' acceptance of cards, the effects of other countries' actions to limit interchange fees, and the impact on federal entities - government agencies and federal corporations like the U.S. Postal Service - of using cards to make purchases.

In a recent study, the GAO found that in fiscal year 2007, federal entities accepted cards for over $27 billion in revenues and paid at least $433 million in associated merchant discount fees, of which interchange is one part.

In cases where the GAO could separately identify interchange costs, federal entities collected $18.6 billion in card revenues and paid $205 million in interchange fees.

Five times original debt?

In an Aug. 4, 2008, letter to the Board of Governors of the Federal Reserve System, Sen. Carl Levin, D-Mich., described the credit card industry as "rife with unfair, deceptive and predatory practices."

Levin urged the Federal Reserve to expand the Proposed Rule on Unfair or Deceptive Acts or Practices Related to Consumer Credit Cards "to prohibit or restrict additional unfair and deceptive practices, including the charging of interest for debt paid on time, interest on transaction fees ... and the billing of amounts that force consumers to pay four or five times their original credit card debt." end of article

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