Merchant Payments Coalition Speaks Out Re: Interchange Fees

"A New Business Model for Card Payments," issued by Chicago's Diamond Management and Technology Consultants Inc. (http://www.diamondconsultants.com), notes that "processing - the original reason for interchange - comprises only 13 percent of interchange costs." Meanwhile, the largest component of interchange, paying for issuer rewards programs, accounts for 44 percent of interchange costs, "but merchants get nothing out of these programs," the report adds.

And the trend is expected to get worse unless there is a fundamental change in how the U.S. credit card system operates.

"The card associations and their bank issuers are pursuing revenue growth through higher interchange rates," according to the report, which notes that since 1999, interchange fees have continually risen. "Given the merchants' lack of perceived value for what they pay, the situation is clearly unstable," the report adds.

"This report corroborates the message that merchants have communicated to lawmakers over the past year -- that interchange fees are far, far higher than the actual benefits delivered to both merchants and the vast majority of consumers," said MPC Chairman Mallory Duncan, senior vice president and general counsel at the National Retail Federation. "This is important research that will help the public understand how much Visa and MasterCard are needlessly charging them. Among other things, this fee is fueling the flood of credit card offers stuffing consumers' mailboxes."

"Visa and MasterCard rules effectively require that interchange be built into prices and make cash discounts all but impossible, so these fees take money out of consumers' pockets regardless of how they pay," Duncan said. "Consumers are led to believe that rewards are free, but this study shows consumers are being charged for these rewards whether they ever get to use them or not."

Given Visa and MasterCard's refusal to fully disclose operating rules that govern interchange, the study offers a rare glimpse into what costs are paid for by the largely unknown fees. In addition, the researchers said merchant dissatisfaction with unreasonable interchange fees raises important questions about the future of the credit card business model and may lead to the unraveling of the traditional system in coming years.

MPC has argued that collective setting of interchange fees by Visa and MasterCard violates federal antitrust laws and costs merchants and consumers an estimated $30.7 billion last year. MPC is fighting for greater transparency, the disclosure of operating rules that govern interchange rates, and reasonable fees based on actual transaction costs.

Interchange is a percentage of each transaction that Visa and MasterCard banks collect from merchants every time their credit or debit cards are used to pay for a purchase. The fee varies with type of merchant, transaction and card, but averages close to 2 percent for most credit card and signature debit transactions.

The Merchants Payments Coalition is a group of about 20 trade associations representing retailers, restaurants, supermarkets, drug stores, convenience stores, gas stations, on-line merchants and other businesses that accept debit and credit cards. MPC is fighting for a more competitive and transparent card system that works better for consumers and merchants alike. The coalition's member associations collectively represent about 2.7 million locations with approximately 50 million employees.