As a smart consumer, you check your credit card statements every month for errors and unexpected charges. But did you know that the most lucrative fee the credit card companies collect doesn’t show up on your statement? They are called credit card interchange fees, and most consumers have never even heard the term. So what are they, and how do they work?
Merchants have to pay an interchange fee to the credit card issuer every time they accept payment by credit or debit card. Currently, they are charged around two percent of every purchase. So if you charge $100 at your local convenience store, the store pays a $2 fee. When you take into consideration how many purchases are put on credit every day, it’s easy to see how that could add up! In fact, it’s estimated that over $48 billion in interchange fees were collected by credit card companies in 2008. This is more than they collected in late and over-limit fees combined.
The major credit card vendors, Visa and MasterCard, set the interchange percentage. They claim that the fees are necessary to fund the cost of the service that they provide to both merchants and consumers. Having a customer swipe their card is less labor intensive for the merchant than collecting cash or verifying a personal check, and several studies have shown that customers who use credit spend more than those who use cash. Meanwhile, the credit card vendor and issuer does most of the work of transferring the funds and mediating disputes.
According to retailers, credit card interchange fees are exorbitant and are an expense that they have no control over. Retailer associations claim that Visa and MasterCard act in collusion to fix the rate of the fee, and change it with little notice and for no expressed reason. Retailers really have no choice – either accept credit card payments and pay whatever fee is required, or don’t accept them and lose customers. Unfortunately, credit card interchange fees are ultimately paid by all consumers, not just those that use credit or debit cards. Merchants have no way of knowing what percentage of their sales will be cash or credit, so they have to budget assuming that every sale will generate an interchange fee. In other words, these fees are built into the cost of every item.
There is another way credit card interchange fees affect the average consumer. These fees allow credit card issuers to extend credit to sub par applicants with less risk. Even if the card holder defaults at some time in the future, the credit card company will collect interchange fees on every purchase they make until then.
In May of 2009, the President signed the Credit Card Accountability, Responsibility and Disclosure Act. The media attention focused on the provisions to limit the credit issuers’ ability to change interest rates and fees retroactively and without a stated reason. But the bill also authorized an investigation into the practices behind credit card interchange fees. There has been further legislation introduced in the US Senate attempting to create some kind of mediation and transparency between retailers and credit card companies when negotiating interchange rates.
Whether or not these bureaucratic attempts are successful remains to be seen. Regardless, credit card interchange fees will continue to play a leading role in the way we shop and the way we run our businesses.