Credit Card Interchange Fees Controversy

Most of us are painfully familiar with many fees that credit card companies impose on consumers. Interest rates, late fees, past due fees, and over limit fees are constant topics of conversation. But the fee that credit card companies make the most money on is one you’ve probably never heard of, and one you pay for even if you don’t use credit. Interchange fees are the foundation of credit issuers profits and the next big controversy of the credit crisis.

An interchange fee is the fee that a merchant pays to a credit card issuer every time they accept a credit card payment. In other words, every time you use your credit card to pay for groceries, the grocery store pays a fee to the bank that issued you the card. These charges are passed on to consumers in the form of higher prices. Have you ever wondered why some small local stores require you to spend a certain amount in order to charge your purchase? It’s because retailers pay fees for the privilege of accepting credit card payments!

Interchange fees are currently around 2% of the purchase charged. So for every $100 received, a merchant pays $2. At first this doesn’t seem like much, until you begin to consider the volume of credit card purchases every year. In 2008, merchants paid approximately $48 billion in interchange fees to credit card companies. This figure dwarfs the money received by credit card issuers for any other type of fee.

There are several controversial elements to interchange fees. The interchange rate is set by Visa and Mastercard at whatever level they choose, and can be changed at any time. According to banks, merchants can negotiate what percentage they are willing to pay. According to merchants, banks know that a retailer can’t afford not to offer payment by credit card, so they must pay whatever the set rate is or risk losing a lot of business.

Another problem involves how the fees are passed down to consumers. There’s no reasonable way for retailers to only charge a surcharge to credit card users, since they usually don’t know how you will be paying for your purchase until after they’ve given you a total. So instead, merchants build the cost of offering credit card payments into the price of everything. Which means even if you pay cash, you are paying for interchange fees.

Finally, interchange fees allow banks to profit from even the most irresponsible consumers. You might not pay off your debt, but every time you charge something, the issuer collects an interchange fee. This issue has become the hot topic of debate. Big banks were not as careful as they should have been in granting consumers credit, partly because they knew at the very least they would be able to collect these interchange fees from merchants while high-risk debtors were racking up their balances. Many experts are warning that the “Credit Card Crunch” will be the next punch to land on our shaky economy, and they point to the interchange fee system as a major cause.

In the 2009 Credit Card Accountability, Responsibility, and Disclosure Act, there was a clause to set up an investigation into interchange fees. A bill was also introduced to the US Senate in June 2009 to set up a framework where retailers could negotiate a fee structure with the big banks. Regardless of whether these attempts move forward, all consumers will continue to pay this silent fee every time they pull out their credit card.