Are American shoppers and businesses paying billions of dollars more than they should be to use credit cards? That’s the big question that the House Financial Services Committee will look at Thursday.
The issue: interchange fees, the roughly 2% of every credit card swipe that goes to the bank that issued the card. That’s a real cost for small merchants that do a lot of credit card sales, particularly in thin-margin businesses like grocery or convenience stores. (7-Eleven is lobbying aggressively on this issue.)
How much do interchange fees cost? $48 billion a year, according to the Merchant Payments Association, a coalition of mostly retail trade associations lobbying to restrict the fees. How much do merchants pay? To put that in perspective, Home Depot pays more in interchange fees than for employee health care. Some of those costs get passed on to consumers.
It’s not a black-and-white issue. I think opponents who call interchange “hidden fees” aren’t quite right. Credit cards provide a service (both to merchants and consumers) that someone needs to pay for. Card issuers say interchange fees fund rewards programs, protection against fraud, and other costs.
But interchange fees are the largest piece of the costs associated with accepting credit cards. Here’s a look at how the fees on a typical credit card transaction break down, according to Dan Price, founder of Seattle credit card processor Gravity Payments:
On average, 1.75% goes to the bank that issued the credit card; 0.1% goes to the network (Visa or MasterCard); and between 0.5% and 1% goes to the processor. [Update: A Visa rep wants me to clarify that the the 1.75% going to the bank is the interchange fee, and the 0.1% that goes to the network is a separate fee. If that wasn’t clear already, my apologies.] (Price says Gravity Payments, whose business model depends on holding onto customers longer than most processors, charges about 0.33% for processing.)
There’s not a lot of transparency about how these fees are calculated. From Floyd Norris in the NY Times last week:
How much less depends on what kind of business the store has. (Food stores pay smaller fees than clothing stores.) It depends on what kind of market power the store has. (Home Depot gets a bigger share than Fred’s Hardware.) It depends on whether the card is a credit or debit card. (Debit cards have lower fees.) It even depends on whether a credit card offers rewards. So when I use the Visa card that gives me airline miles, the merchant gets less than if I use a basic Visa card.
How opaque is it? You can look at the interchange rates for Visa and MasterCard. (The networks set the rates, even though the fees are paid to the banks that issue the cards.) The MasterCard document is 100 pages.
I’d like to hear from merchants on this one. Some retailers have even stopped accepting credit cards because of the fees, although that seems like a move that would cost more in lost sales than save in fees for most companies. How much do you pay in interchange fees? Does your company offer discounts for cash? If your interchange costs went down, would you lower prices for consumers? Let us know in comments below or on Twitter.