Sometimes those hurt most by credit cards don't even own one.
At least that's the conclusion from an unusual alliance of merchants and consumer advocates fighting against what they say is an unfair, nonnegotiable fee charged by banks that issue credit cards.
They're supporting congressional efforts to establish a negotiation process to set interchange fees, a processing fee that they say currently fattens bankers' wallets and subsidizes credit-card rewards programs. Currently, credit-card issuing banks set these fees. Merchants have no say, and if they wish to accept credit-card payments, they must either raise prices or absorb the fee themselves.
As a result, advocates say, consumers often wind up paying more for goods and services. And the unbanked – those who lack credit cards with rewards benefits, such as frequent-flyer miles – are the hardest hit.
"The problem with the interchange fee is the have-nots: They're cross-subsidizing the miles of people who go on a ski vacation," says Edmund Mierzwinski, consumer program director for U.S. PIRG, the Washington-based federation for state public interest research groups.
Credit-card companies dispute arguments that interchange fees are burdensome and question who will benefit from legislation. Interfering with the free market, they say, may increase merchants' profits, while reducing available credit and rewards programs for consumers – without any guarantee of lower prices.
"Retailers pay approximately two pennies on the dollar to accept credit and debit payments. This rate has stayed fairly constant in the past decade – and in fact has decreased in the gas segment. In exchange, retailers see increased revenue, guaranteed and fast payment, and significant fraud protections," Trish Wexler, spokeswoman for the Electronic Payments Coalition, a group that includes payment-card networks, financial-services firms, and financial services trade associations, writes in an e-mail.
Congress still contemplating
Whether legislators will approve of congressional oversight of a fee-negotiation process remains speculative. The Credit Card Fair Fee Act of 2008, approved by the House Judiciary Committee this summer, would enable merchants to collectively negotiate fees with providers who have "substantial market power." If an agreement is not reached, a panel of judges from the Federal Trade Commission and the Department of Justice Antitrust Division would oversee binding arbitration.
The bill has also been introduced in the Senate, and comes on the heels of antitrust lawsuits as well as other legislation advocating more transparency in credit-card rates and billing procedures.
"It sends a serious message to Wall Street that 'you're wrong,' says Mr. Mierzwinski.
Interchange fees have become increasingly important to credit-card companies and their issuing banks, says J. Craig Shearman, vice president of government affairs for the National Retail Foundation. The NRF estimates that interchange fees will reach $48 billion this year, an amount that has tripled since 2001, mainly due to increased credit and signature debit-card use.
The fee, which kicks in every time customers swipe their credit cards or sign for a debit-card purchase, hovers around 2 percent of the price paid. (Debit purchases that require shopper to enter a PIN number incur other, smaller fees.). Rates are often lower for high-volume stores, and the interchange fee applied to a rewards card is usually higher than cards without such benefits.
Visa, MasterCard dominate market
Interchange-fee rules are set by banks that issue Visa and MasterCard, which control more than 80 percent of the credit-card market, according to the NRF (American Express has a different fee arrangement). Merchants must accept these terms or not allow the cards. Though the rules let merchants offer discounts to customers who pay with cash, they cannot assess surcharges for credit-card purchases.
That leaves merchants with few options, says Curtis Arnold, founder of CardRatings.com. "Are they just going to absorb the fees? Probably not – they're going to raise the costs of goods and services," he says.
"There's no question – if 50 percent of [a merchant's] transactions are on plastic and interchange fees average 2 percent, the average cost to everybody is 1 percent higher than it should be," Mierzwinski says.
The NRF charges that only about 13 percent of an interchange fee goes toward processing a transaction, "with most of the rest going to the cost of card issuers' rewards programs and profits," according to an NRF news release.
MasterCard disputes the notion that interchange fees are unreasonable. "Merchants are trying to position this as a consumer issue. But it's the cost of doing business for them. Every cost of business is probably reflected [in prices]," says Sharon Gamsin, a MasterCard spokeswoman.
Ms. Gamsin says governmental oversight, rather than enabling a fair market fee price, would limit the interchange-fee competition that already exists between Visa and MasterCard.
"We use them as a way to entice more issuance of cards and more issuance benefits merchants.… Is a government agency going to be able to understand and replicate the way we compete with each other?" she asks.
Gamsin adds that credit cards often allow people to spend more money than cash, which benefits merchants.
"I don't know about you, but when I go to Bloomingdale's, I spend more with my credit card than I would if I could only spend cash," she says.
Fees addressed down under
In Australia, when government regulation cut interchange fees, merchants' fees went down, Gamsin says. Despite levying surcharges to swipe, there's no evidence Australian merchants lowered prices, a MasterCard press release says.
Mierzwinski testified before Congress in May that Australian reductions actually "led to reduction of card costs, greater innovation, and greater competition leading to lower interest rates."
Fee changes, legislated or otherwise, could benefit consumers, other policy experts say.
Adam Levitin, associate professor of law at the Georgetown University Law Center, says two policy options deserve attention. One would ban rewards programs altogether. Bundling points and rewards with purchases distorts the card's purpose, he says, which is to allow consumers to make payments and build credit. By encouraging people to spend more, rewards programs lead to "greater use of a credit card," which can hurt the unbanked via price increases and lead to debt levels others cannot afford.
Another option would be to allow merchants to charge a small fee for using a credit card – which would help the unbanked in particular. "It seems only fair. If I'm getting a benefit, why should others be paying for my cash back? I'm getting a discount not available to a poor person," he says.
For now, Shearman of the NRF says, it's consumers who pay. "Credit card companies go so far as to say that [the charges are between] consumers' banks and merchants' banks. In reality, they're putting their hand into the pocket of the consumer and taking the fee out."