Interchange fee

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Did anyone else see this interesting LA Times article about interchange fees? It's worth a read, since it's something that affects us all by making what we buy more expensive only to increase the profits of the credit card companies and fund their rewards card programs.

Quote:

Credit card companies have always taken their cut when a customer uses plastic, part of the cost of doing business electronically.

But a surge in the fees has sparked an intense dispute, with small merchants complaining that the higher charges are forcing them to raise prices and, in some cases, threatening to drive them out of business.

The article goes on to explain what the interchange fee is and how much it costs merchants and consumers alike.

Quote:

The charges, called interchange fees, vary depending on the type of credit or debit card, purchase and merchant. Most come as a flat fee of 10 to 25 cents per transaction, plus a percentage of the sale, about 2% on average. Thus, a $100 purchase would include about $2 or slightly more in fees, which the credit card company shares with the bank that issued its card and the bank that processed the purchase for the merchant.

The average U.S. family pays the fees indirectly through higher prices, about $300 a year, according to the Merchants Payments Coalition. The Washington-based group, which represents 2.7 million businesses, estimates that merchants' interchange costs more than doubled to $35 billion last year from 2001.

Credit card companies' profits from interchange fees rose 33% from 1990 to 2004, according to a September report by the Government Accountability Office.

That sounds like the good 'ol credit card companies. I anyone else familiar with this issue?

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*shrugs* Stop using plastic and pay in cash. Problem solved.

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Many businesses seem to prefer plastic, and I'm sure it's been factored into the prices for decades. Just try and check into a hotel above the level of the No Tell Motel with cash. They'll take it. They will also look you over real well and probably decide to collect a substantial "Key" deposit, too.

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fishin wrote:

*shrugs* Stop using plastic and pay in cash. Problem solved.

As I mentioned above, even if you pay with cash you are affected because the high interchange fees result in higher prices on everything we buy. Plus, it still bothers me that Visa and Mastercard, who have about 80% of the market, can set whatever rates they want and prevent merchants from telling consumers about these fees.

So, problem not solved. Plus, more and more people are using plastic even for very small purchases.

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Funny I was just having this conversation with some one as my husband just opened up a small business and accepts credit cards.

The one thing that this person I was having a conversation pointed out is that by using cash you can often times negotiate a lower price because of these fees. Simply find a manager and negotiate away. He has often received discounts as a result.

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Winthorpe wrote:

fishin wrote:
*shrugs* Stop using plastic and pay in cash. Problem solved.

As I mentioned above, even if you pay with cash you are affected because the high interchange fees result in higher prices on everything we buy. Plus, it still bothers me that Visa and Mastercard, who have about 80% of the market, can set whatever rates they want and prevent merchants from telling consumers about these fees.

So, problem not solved. Plus, more and more people are using plastic even for very small purchases.

Visa and Mastercard don't set the fees and there is no conspiracy to hide what the fees are from the customers. A quick Google search will give you several thousand lists of the various merchant card processing companies and what their fees are.

For example:
http://www.infomerchant.net/creditcardprocessing/cc-processors.html

If people aren't aware that stores pay processing fees then that is by their own ignorance.

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fishin is correct - these are not hidden fees, simply that most consumers are unaware that businesses are charged when they accept payment through credit card companies.

But honestly how are credit card companies supposed to survive if they don't charge fees? They are in business too to make money - it costs them to process the charges, send out the bills, etc. You are simply paying for a service. In return as a consumer you get the convience of not needing cash, no direct fees if you pay on time, and most provide various other types of protection and often other types of rewards - air miles, etc.

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fishin wrote:

Visa and Mastercard don't set the fees and there is no conspiracy to hide what the fees are from the customers. A quick Google search will give you several thousand lists of the various merchant card processing companies and what their fees are.

For example:
http://www.infomerchant.net/creditcardprocessing/cc-processors.html

If people aren't aware that stores pay processing fees then that is by their own ignorance.

Yes, the Visa and MasterCard members set the fees. Plus, the fee gets split between the credit card companies, the processing companies, etc. As the wikipedia entry states,

[/QUOTE]For one example of how interchange functions, imagine a consumer making a $100 purchase with a credit card. For that $100 item, the retailer would get approximately $98. The remaining $2, known as the merchant discount and fees, gets divided up. About $1.75 would go to the card issuing bank (defined as interchange), $0.18 would go to Visa or MasterCard association (defined as assessments), and the remaining $0.07 would go to the retailer's merchant account provider. If a credit card displays a Visa logo, Visa will get the $0.18, likewise with MasterCard. Visa's assessment is fixed at 0.0925% of the transaction value and MasterCard's assessment is fixed at 0.0950% of the transaction value. On average the interchange rates in the US are 179 bps (1.79%) and vary widely across countries.[/QUOTE]

Regarding disclosure from the credit card companies, the LA Times article noted,

Quote:

Merchants and consumer advocates hope the increased attention from Congress will be enough to get credit card companies to lower or cap their fees.

After Congress began focusing on the fees last fall, Visa and MasterCard posted them online. This year, MasterCard agreed to limit interchange fees on gasoline purchases to the first $50, and Visa agreed to lower fee rates for some purchases of $25 or less.

It is amazing what the threat of Congressional action can do.

As for people's awareness of the fee, not many people do know. I'll leave it up to others to decide if this is a matter of ignorance or the credit card companies trying to keep a low profile on this issue, in fact calling the fee "merchant discount fee."

Quote:

In a January survey of about 2,000 adults by polling service Harris Interactive, 32% had heard of interchange fees. Once the fees were explained to them, 91% said Congress should compel credit card companies to better inform consumers about interchange fees.

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Linkat wrote:

fishin is correct - these are not hidden fees, simply that most consumers are unaware that businesses are charged when they accept payment through credit card companies.

But honestly how are credit card companies supposed to survive if they don't charge fees? They are in business too to make money - it costs them to process the charges, send out the bills, etc. You are simply paying for a service. In return as a consumer you get the convenience of not needing cash, no direct fees if you pay on time, and most provide various other types of protection and often other types of rewards - air miles, etc.

Survive? Please, the credit card companies are just fine and making tons of money. I completely agree with you and am fully supportive of companies making a profit for providing a service. I have credit cards and are very useful in certain cases. However, my gripe here comes from the fact that the interchange fee, the largest fee out there at more than $37 billion last year, has doubled in the last five years.

Sure they should be reimbursed for processing costs plus a little profit. However, only 13% of the interchange fee covers the processing cost while the rest pays for rewards programs, marketing so we call can receive 500,456 pre-approved credit card offers per year and to increase their profit. I would say if only 13% covers the processing cost, that is a little more than paying for a service. One would think as the volume of plastic purchases and with technology making the processing cheaper and faster that these costs would drop, but as I said they are growing exponentially.

By the way, I have found a ton of this information and research reports at www.unfaircreditcardfees.com

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Winthorpe wrote:

However, my gripe here comes from the fact that the interchange fee, the largest fee out there at more than $37 billion last year, has doubled in the last five years.

So what if their revenue from fees doubled? You haven't yet explained why people should be concerned about it.

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Winthorpe wrote:

Linkat wrote:
fishin is correct - these are not hidden fees, simply that most consumers are unaware that businesses are charged when they accept payment through credit card companies.

But honestly how are credit card companies supposed to survive if they don't charge fees? They are in business too to make money - it costs them to process the charges, send out the bills, etc. You are simply paying for a service. In return as a consumer you get the convenience of not needing cash, no direct fees if you pay on time, and most provide various other types of protection and often other types of rewards - air miles, etc.

Survive? Please, the credit card companies are just fine and making tons of money. I completely agree with you and am fully supportive of companies making a profit for providing a service. I have credit cards and are very useful in certain cases. However, my gripe here comes from the fact that the interchange fee, the largest fee out there at more than $37 billion last year, has doubled in the last five years.

Sure they should be reimbursed for processing costs plus a little profit. However, only 13% of the interchange fee covers the processing cost while the rest pays for rewards programs, marketing so we call can receive 500,456 pre-approved credit card offers per year and to increase their profit. I would say if only 13% covers the processing cost, that is a little more than paying for a service. One would think as the volume of plastic purchases and with technology making the processing cheaper and faster that these costs would drop, but as I said they are growing exponentially.

By the way, I have found a ton of this information and research reports at www.unfaircreditcardfees.com

And what other things are doubled in price in the last five years? Gold prices, gas prices, home prices, and I am sure if I did a little research I could find many items that at least doubled in five years. Do you plan on attacking those groups as well?

Isn't this simply supply and demand - consumer want those extra rewards - it is a way to market to a group of individuals. Not much different than your CVS card and other sorts of rewards. If you want to get money back you can also get credit cards that reward you in that way.

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fishin wrote:

So what if their revenue from fees doubled? You haven't yet explained why people should be concerned about it.

Not the revenues, but the fees doubled (from www.unfaircreditcardfees.com)

Quote:

Transactional costs like credit card interchange fees should drop with volume, but instead these fees keep rising. In 2001, Visa, MasterCard and their issuing banks collected $16.6 billion in credit card interchange fees. By 2005, these fees increased to $30.7 billion - more than the total amount of penalty fees and ATM fees combined.

Also if you read my previous comments it should be quite clear why people should be concerned. The extremely high interchange fees we have in the US, the highest in the world, raises the price on everything we buy whether you pay with plastic or cash. This is yet another example of the credit card companies using their muscle (market share) to do as they please. They are raising these rates and trying their best to get a cashless society so they get a cut of every purchase made.

Also, while you are correct that the existence of this fee isn't hidden (most people are simply unaware of it) there is a serious disclosure problem as merchants aren't allowed to tell consumers the cost of interchange fees. Also, from what I read the agreements that merchants sign with the credit card companies are almost impossible to decipher.

Maybe you don't mind this, but I do and from the many consumers and merchants I have seen quoted in articles and online discuss this issue, they care.

0 Replies

Linkat wrote:

And what other things are doubled in price in the last five years? Gold prices, gas prices, home prices, and I am sure if I did a little research I could find many items that at least doubled in five years. Do you plan on attacking those groups as well?

Isn't this simply supply and demand - consumer want those extra rewards - it is a way to market to a group of individuals. Not much different than your CVS card and other sorts of rewards. If you want to get money back you can also get credit cards that reward you in that way.

No, I'm just referring to the credit card industry here which has unique circumstances, namely market share. I understand supply and demand and support how the system works. However, as this quote mentions, this is a cycle promoted by Visa and MasterCard that raises prices for everyone so a few people can get benefits. I would rather have cheaper goods than a rewards card.

Maybe a few more points from www.unfaircreditcardfees.com

Quote:

We have a system where Visa and MasterCard want to attract more issuing banks, and in order to do so, they actually vie to charge higher interchange fees instead of the lower rates that would benefit consumers. These are fees that banks collect and all consumers pay.

The banks that make up Visa and MasterCard have colluded to set these interchange fees, operating in price-fixing cartels that would violate federal antitrust law in other industries.

Quote:

Visa and MasterCard charge Americans among the highest credit card interchange fees in the world - averaging close to 2 percent for credit card and signature debit transactions, compared with only 0.7 percent in the United Kingdom and 0.55 percent in Australia. The difference translates into hundreds of dollars in added costs to the average American family.

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I can remember when cash purchases of gasoline were 3 or 4 cents lower than credit card purchases for this very reason. Then, the price of gas was raised to cover the interchange fee and everyone had to pay the higher price. This is one example of what you're describing -- higher prices for all because of the interchange fees on credit purchases. My understanding is that the change was made (in the gasoline case, at least) because the percentage of customers using charge cards via 'pay at the pump' far exceeded the number using cash. In other words, most people were using credit, so instead of charging extra for the credit purchasers, the price was raised globally. Similar increases were made in other industries, not necessarily because the credit card companies are pushing for a cashless society, but because more and more people are charging more and more of their expenditures.

I charge everything. Then I pay the balance in full at the end of the month. All my purchases show up in one place and I only have one bill to pay. The cost of the charges has been built into everything I charge -- it works for me.

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Winthorpe wrote:

Linkat wrote:
And what other things are doubled in price in the last five years? Gold prices, gas prices, home prices, and I am sure if I did a little research I could find many items that at least doubled in five years. Do you plan on attacking those groups as well?

Isn't this simply supply and demand - consumer want those extra rewards - it is a way to market to a group of individuals. Not much different than your CVS card and other sorts of rewards. If you want to get money back you can also get credit cards that reward you in that way.

No, I'm just referring to the credit card industry here which has unique circumstances, namely market share. I understand supply and demand and support how the system works. However, as this quote mentions, this is a cycle promoted by Visa and MasterCard that raises prices for everyone so a few people can get benefits. I would rather have cheaper goods than a rewards card.

Maybe a few more points from www.unfaircreditcardfees.com

Quote:
We have a system where Visa and MasterCard want to attract more issuing banks, and in order to do so, they actually vie to charge higher interchange fees instead of the lower rates that would benefit consumers. These are fees that banks collect and all consumers pay.

The banks that make up Visa and MasterCard have colluded to set these interchange fees, operating in price-fixing cartels that would violate federal antitrust law in other industries.

Quote:
Visa and MasterCard charge Americans among the highest credit card interchange fees in the world - averaging close to 2 percent for credit card and signature debit transactions, compared with only 0.7 percent in the United Kingdom and 0.55 percent in Australia. The difference translates into hundreds of dollars in added costs to the average American family.

Then why not simply pay in cash and negotiate with the business you are paying for a discount - same as my first comment? Many businesses do this - you split the savings of the fee between the two of you.

I am with JPB - I like the extra protection given of the credit card - insurance with rental cars, etc and I do gain with the extras I receive. I don't like to carry cash and hate to go out of my way to ATMs so I prefer using the credit card. Like JPM I get a summary of my purchases so it is easy to track my purchases and for receipt purposes. I do also benefit from the bonus programs - and like JPM I pay the balance in full each month.

I also understand the burden of the charges as my husband now owns a small business and yes he would prefer to deal in cash and save some money, but on the other hand if they didn't accept charges, the customers without cash would go elsewhere. Getting a small percentage less is better than getting nothing at all.

So unless you can change the purchasing habits of all Americans, I doubt the fees will fall.

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Winthorpe wrote:

fishin wrote:
So what if their revenue from fees doubled? You haven't yet explained why people should be concerned about it.

Not the revenues, but the fees doubled (from www.unfaircreditcardfees.com)

Quote:
Transactional costs like credit card interchange fees should drop with volume, but instead these fees keep rising. In 2001, Visa, MasterCard and their issuing banks collected $16.6 billion in credit card interchange fees. By 2005, these fees increased to $30.7 billion - more than the total amount of penalty fees and ATM fees combined.

Also if you read my previous comments it should be quite clear why people should be concerned. The extremely high interchange fees we have in the US, the highest in the world, raises the price on everything we buy whether you pay with plastic or cash. This is yet another example of the credit card companies using their muscle (market share) to do as they please. They are raising these rates and trying their best to get a cashless society so they get a cut of every purchase made.

Also, while you are correct that the existence of this fee isn't hidden (most people are simply unaware of it) there is a serious disclosure problem as merchants aren't allowed to tell consumers the cost of interchange fees. Also, from what I read the agreements that merchants sign with the credit card companies are almost impossible to decipher.

Maybe you don't mind this, but I do and from the many consumers and merchants I have seen quoted in articles and online discuss this issue, they care.

The quote you list from the WWW site doesn't say anything about the fees being increased. It says the total amount of money collected in fees doubled.

If I am charging the transaction fees I can double my income in two ways:
1. I can double the fee I charge or
2. I can convince people to double their purchases using the cards.

Either way the amount that ends up in my pocket doubles.

The average interchange rate in 1998 was 1.54%. In 2004 it was at 1.75%. During that same period, revenue from those fees was up 85%. The fee increases don't account for the revenue increase so it has to be coming from increased use of the cards.

And it's not that I don't mind this all. But I do find it rather silly to get worked up that merchants aren't revealing what they pay to consumers. They also don't tell consumers what they pay in overhead to run their store or the wholesale prices they pay for the goods they are selling. I simply don't see why people should get spun about about where 2% of their purchase goes when they don't have any idea where the other 98% goes either.

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Winthorpe wrote:

Quote:
Visa and MasterCard charge Americans among the highest credit card interchange fees in the world - averaging close to 2 percent for credit card and signature debit transactions, compared with only 0.7 percent in the United Kingdom and 0.55 percent in Australia. The difference translates into hundreds of dollars in added costs to the average American family.

Is that all there is to the equation? Ok, the interchange rates are higher in the U.S.. I'll accept that.

But according to this article the consumers in other countries pay fees that we don't pay. Canadian debit card users pay a transcation fee every time they use their card. We don't. French debit card user's pay an annual fee for their debit cards. Again, we don't.

How does that come out in the end? If what I pay to a store to cover interchange fees drops by $60/year and then I have to pay $60/year to have the card what have I gained?

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JPB wrote:

I can remember when cash purchases of gasoline were 3 or 4 cents lower than credit card purchases for this very reason. Then, the price of gas was raised to cover the interchange fee and everyone had to pay the higher price. This is one example of what you're describing -- higher prices for all because of the interchange fees on credit purchases. My understanding is that the change was made (in the gasoline case, at least) because the percentage of customers using charge cards via 'pay at the pump' far exceeded the number using cash. In other words, most people were using credit, so instead of charging extra for the credit purchasers, the price was raised globally. Similar increases were made in other industries, not necessarily because the credit card companies are pushing for a cashless society, but because more and more people are charging more and more of their expenditures.

I charge everything. Then I pay the balance in full at the end of the month. All my purchases show up in one place and I only have one bill to pay. The cost of the charges has been built into everything I charge -- it works for me.

You are smart to pay off your balance each month, what the credit card companies refer to as a "deadbeat" since they don't make much money off of you other than interchange fees.

Yes, the gasoline example is exactly what I am referring to. Merchants today under the agreements they sign with the credit card companies are prohibited from labeling items to show the difference in prices or to give a cash discount (not to say this doesn't still happen).

As for the trend, one fuels the other and the credit cards are certainly doing everything in their power to get us to a cashless society and predicting it is a foregone conclusion. Every day it seems I am reading about advancements made to facilitate this goal. Sure many people enjoy the convenience, but their certainly is a motive for the companies.

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fishin wrote:

The quote you list from the WWW site doesn't say anything about the fees being increased. It says the total amount of money collected in fees doubled.

If I am charging the transaction fees I can double my income in two ways:
1. I can double the fee I charge or
2. I can convince people to double their purchases using the cards.

Either way the amount that ends up in my pocket doubles.

The average interchange rate in 1998 was 1.54%. In 2004 it was at 1.75%. During that same period, revenue from those fees was up 85%. The fee increases don't account for the revenue increase so it has to be coming from increased use of the cards.

And it's not that I don't mind this all. But I do find it rather silly to get worked up that merchants aren't revealing what they pay to consumers. They also don't tell consumers what they pay in overhead to run their store or the wholesale prices they pay for the goods they are selling. I simply don't see why people should get spun about about where 2% of their purchase goes when they don't have any idea where the other 98% goes either.

My apologies, in my haste I omitted some key words. Your are correct that it was the amount collected from interchange doubled, yet as you noted the fees were increased. As you also mention, the volume increased dramatically which normally dictates a decrease in fees, but not in this case.

As the article you found states,

Quote:

Interchange fees on all U.S. purchases average about 1.56%, according to a Federal Reserve study issued in May 2005. Although less than 2% seems insignificant, due to the sheer volume of credit card transactions and the compressed margins card issuers and merchants face, interchange fees have become a major revenue stream for issuers but a major expense for merchants. ISOs and merchant level salespeople (MLSs), largely spectators pinned in the eye of a storm of controversy, still stand to be affected by its aftermath.

This one is interesting,

Quote:

Interchange is also a significant, and growing, expense for merchants. According to the National Association of Convenience Stores (NACS), credit and debit card fees are the third largest expense convenience stores face after store rent and labor costs.These fees are anticipated to match the cost of store rent by 2020.

So as the volume continues to increase this fee will hurt merchants more and more.

It is the principle of the issue, and when 2% = $37 billion a year, it's not pocket change we are talking about here. The disclosure aspect goes back to the issue of credit card companies rather shady practices. They haven't exactly been known for their openness and easily understandable language used in agreements.

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Winthorpe wrote:

JPB wrote:
I charge everything. Then I pay the balance in full at the end of the month. All my purchases show up in one place and I only have one bill to pay. The cost of the charges has been built into everything I charge -- it works for me.

You are smart to pay off your balance each month, what the credit card companies refer to as a "deadbeat" since they don't make much money off of you other than interchange fees.

And they encourage me to charge more and more by raising my credit limit periodically without my asking them to in the hopes that the higher limit will entice me to make more purchases via credit and generate more interchange fees. It's a game. I know exactly what they're up to and don't fall into the traps. It's simply not a problem.

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