May 16, 2008
Interchange Fee Debate Goes to Capital Hill
When it comes to paying for retail purchases, the majority of consumers prefer to use plastic rather than cash. In recent years, fast food operators, convenience stores and others that had traditionally been cash businesses began accepting credit and debit cards in response to consumer demand for those payment options.
While consumers prefer the ease of paying with plastic, retailers have maintained that fees levied by banks for processing transactions are exorbitantly high and ultimately wind up being passed along in higher prices to shoppers.
While banks normally pay credit card companies an interchange fee that ranges between 1.6 and two percent of each transaction, the financial institutions are free to add charges for processing transactions.
The National Retail Federation (NRF) estimates that retailers will pay banks $48 billion in fees this year, up from $16 billion in 2001. The current system costs the average American family $427 a year, according to the NRF.
“If consumers knew how much they are actually paying for credit cards, most would say they aren’t worth the price,” said Mallory Duncan, senior vice president and general counsel for the NRF, in a released statement. “U.S. consumers are paying an outrageously high annual fee that most don’t even know about, and the price is going up dramatically every year.”
Retailers and credit card companies testified before Congress this week as lawmakers consider a bill introduced by Reps. John Conyers (D-Mich.) and Chris Cannon (R-Utah), that would create a federal panel to set interchange rates and terms. The proposed legislation known as the Credit Card Fair Fee Act (H.R. 5546), has the support of retailers and is strongly opposed by the card companies and banks.
Joshua Floum, general counsel for Visa, said the system envisioned by Reps. Conyers and Cannon, “would replace a competitive, free market system with price controls” and ultimately wind up costing consumers because “smaller institutions rely on interchange to keep their card programs running.”
Joshua Peirez, chief payment system integrity officer at MasterCard Worldwide, said merchants have the ability to negotiate fees but have chosen to go through the courts rather than work with banks and card companies. He pointed to interchange fees being reduced for gas stations in 2006 when prices at the pump began to spike.
Retailer have maintained that interchange fees, in reality, are non-negotiable.
“The impact on my industry is incredible,” said Tom Robinson, president of Robinson Oil Corporation and vice chairman of government relations for the National Association of Convenience Stores (NACS). “Every time you buy gasoline, I ask you to remember this: The station you are buying it from is paying more than twice as much money in fees than it is making – and every time gas prices go up, the card fees go right up with them…These fees have simply taken over our industry.”
Convenience stores paid $7.6 billion in interchange fees in 2007 more than double the industry’s profit total, according to Mr. Robinson.
Discussion Questions: Is the Credit Card Fair Fee Act (H.R. 5546) the right approach to the interchange fee problem? Will it ultimately save consumers money as retailers seem to be suggesting or will it wind up costing them more as the credit card companies maintain?
- Retailers assail credit card fees in House hearing – The Associated Press/CNNMoney.com
- Democrat backs credit card transaction fee bill – Reuters
- NRF Says Hidden Credit Card Fee to Cost Families Over $400, Urges Passage of Bill Requiring Visa/MasterCard to Negotiate – National Retail Federation
- High Credit Card Interchange Fees Impact Gas Prices, NACS Testifies – National Association of Convenience Stores
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There is a risk with what the NRF is trying here. But I have to address this sentence: “The National Retail Federation (NRF) estimates that retailers will pay banks $48 billion in fees this year, up from $16 billion in 2001. The current system costs the average American family $427 a year, according to the NRF.” This is another example of a very silly and misleading stat.
According to the NRF statement, this is how they arrived at that figure: “The figure is based on the $48 billion Visa, MasterCard and their banks are projected to collect in interchange during 2008 divided by the U.S. Census Bureau’s estimate of 112.4 million households.”
So, clearly, every household isn’t spending $427. There are households (presumably with a higher income) that are spending a lot more and are therefore paying many dollars for the interchange fee and others that are spending far less. Using the Census figure is rather bizarre. If 1,000 California residents move to Canada, does that somehow cause people to buy more and therefore spending more for that fee?
There’s also an underlying assumption that if the fee were reduced, prices would be reduced by that much. What are the odds of that happening versus retailers adding those pennies to their razor-thin bottom line? Consumers are already paying the same price for cash or check or debit card versus payment card (and, for that matter, the same price for Visa versus Amex). So the logic that a rate reduction would somehow flow to consumers is flawed.
Roadster, don’t get me wrong. I am not in support of the credit card companies either. I think both parties are looking out for themselves without any regard for the benefits of building long term win-win relationships. It just so happens the retailers are the ones holding the short straw this time around.
If the roles were reversed, I can only imagine what the credit card companies would try to do.
This is the kind of legislation that needs to come from the government. We essentially have a few players dominating the market, and the fees they charge (as a percent of operating income) are outrageous. When competition is not available, we need government regulation to protect the consumer. This act is a good thing for our retail efforts to truly move to eliminating the difference between cash and credit. It is about time that the consumer wins!
Thank you, Marc Gordon. As a former CPG supplier, now retired, I agree with you completely. With regards to the fees being twice the actual bank costs for processing… that’s a standard 50% gross profit that many retailers look for in their businesses. I expect that most retailers are getting these expenditures back somehow from the suppliers anyway.
The critical element of the bill is that it forces the credit card companies to be transparent in terms of the fee assessment mechanism. Consumers assume that credit card fee are a very small part of the cost of goods sold, but for the most part don’t know the true impact on their everyday purchases. Two retailers I talked with at FMI last week estimated the true cost to the banks and the card companies for the transactions is about half of what the companies charge, a fact borne out by the financial statements of MasterCard and VISA. One said the best play in this whole scenario is to invest all a store’s profits in VISA or MasterCard stock.
Personally, I always use a credit card not so much for the convenience, but because if I use cash I’m subsidizing the users of credit cards and the store itself, which has built the cost of credit card transactions into its pricing structure. Maybe if stores offered a one percent discount for paying by cash, the free market forces cited by credit card companies would eliminate this problem.
It always makes me laugh when big retailers complain that they are being taken advantage of by service providers and paying too much. Are these guys really looking out for the consumer who they claim is paying higher prices due to transaction fees, or just for themselves? It would be interesting to see what happens if fees are reduced. Will retailers pass the savings onto consumers? Of course not.
The fact is that you have two groups that like to exert as much influence as possible on anyone they feel they can. It just so happens in this case, it’s the credit card companies who have the power.
As a one time supplier to large retailers, it’s tough for me to shed a tear for these guys.
Joshua Floum, of Visa: the current structure is “…a competitive, free market…” Tom Robinson, of NACS: “…They (credit card fees) have simply taken over our industry…”
When businesses lobby Congress, they’d make stronger cases if they used credible arguments. Everyone knows that credit card interchange is based on a tightly coordinated oligopoly, exhibiting classic collusion behavior for years. Everyone knows that gasoline price inflation has nothing to do with credit card fees and everything to do with a greater imbalance of worldwide demand versus supply.
Retailers don’t like the credit card oligopoly? Then why don’t they form their own cooperative network via Retex or the NRF or another industry nonprofit association? Why don’t they collude like the banks? And isn’t it in the government’s interest to discourage the use of cash, to minimize tax evasion?
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There is a risk with what the NRF is trying here. But I have to address this sentence: “The National Retail Federation (NRF) estimates that retailers will pay banks $48 billion in fees this year, up from $16 billion in 2001. The current system costs the average American family $427 a year, according to the NRF.” This is another example of a very silly and misleading stat.
According to the NRF statement, this is how they arrived at that figure: “The figure is based on the $48 billion Visa, MasterCard and their banks are projected to collect in interchange during 2008 divided by the U.S. Census Bureau’s estimate of 112.4 million households.”
So, clearly, every household isn’t spending $427. There are households (presumably with a higher income) that are spending a lot more and are therefore paying many dollars for the interchange fee and others that are spending far less. Using the Census figure is rather bizarre. If 1,000 California residents move to Canada, does that somehow cause people to buy more and therefore spending more for that fee?
There’s also an underlying assumption that if the fee were reduced, prices would be reduced by that much. What are the odds of that happening versus retailers adding those pennies to their razor-thin bottom line? Consumers are already paying the same price for cash or check or debit card versus payment card (and, for that matter, the same price for Visa versus Amex). So the logic that a rate reduction would somehow flow to consumers is flawed.
Roadster, don’t get me wrong. I am not in support of the credit card companies either. I think both parties are looking out for themselves without any regard for the benefits of building long term win-win relationships. It just so happens the retailers are the ones holding the short straw this time around.
If the roles were reversed, I can only imagine what the credit card companies would try to do.
This is the kind of legislation that needs to come from the government. We essentially have a few players dominating the market, and the fees they charge (as a percent of operating income) are outrageous. When competition is not available, we need government regulation to protect the consumer. This act is a good thing for our retail efforts to truly move to eliminating the difference between cash and credit. It is about time that the consumer wins!
Thank you, Marc Gordon. As a former CPG supplier, now retired, I agree with you completely. With regards to the fees being twice the actual bank costs for processing… that’s a standard 50% gross profit that many retailers look for in their businesses. I expect that most retailers are getting these expenditures back somehow from the suppliers anyway.
The critical element of the bill is that it forces the credit card companies to be transparent in terms of the fee assessment mechanism. Consumers assume that credit card fee are a very small part of the cost of goods sold, but for the most part don’t know the true impact on their everyday purchases. Two retailers I talked with at FMI last week estimated the true cost to the banks and the card companies for the transactions is about half of what the companies charge, a fact borne out by the financial statements of MasterCard and VISA. One said the best play in this whole scenario is to invest all a store’s profits in VISA or MasterCard stock.
Personally, I always use a credit card not so much for the convenience, but because if I use cash I’m subsidizing the users of credit cards and the store itself, which has built the cost of credit card transactions into its pricing structure. Maybe if stores offered a one percent discount for paying by cash, the free market forces cited by credit card companies would eliminate this problem.
It always makes me laugh when big retailers complain that they are being taken advantage of by service providers and paying too much. Are these guys really looking out for the consumer who they claim is paying higher prices due to transaction fees, or just for themselves? It would be interesting to see what happens if fees are reduced. Will retailers pass the savings onto consumers? Of course not.
The fact is that you have two groups that like to exert as much influence as possible on anyone they feel they can. It just so happens in this case, it’s the credit card companies who have the power.
As a one time supplier to large retailers, it’s tough for me to shed a tear for these guys.
Joshua Floum, of Visa: the current structure is “…a competitive, free market…” Tom Robinson, of NACS: “…They (credit card fees) have simply taken over our industry…”
When businesses lobby Congress, they’d make stronger cases if they used credible arguments. Everyone knows that credit card interchange is based on a tightly coordinated oligopoly, exhibiting classic collusion behavior for years. Everyone knows that gasoline price inflation has nothing to do with credit card fees and everything to do with a greater imbalance of worldwide demand versus supply.
Retailers don’t like the credit card oligopoly? Then why don’t they form their own cooperative network via Retex or the NRF or another industry nonprofit association? Why don’t they collude like the banks? And isn’t it in the government’s interest to discourage the use of cash, to minimize tax evasion?