Back in December I wrote about how the credit card industry hurts small businesses by charging excessive interchange fees each time a customer uses a credit or debit card. For small mom-and-pop shops these fees can run as high as 4 percent of every credit card transaction. While I pleaded my free market chops, I also approved of legislation to control fees that can be downright excessive and hurtful to small businesses.
Last week, a reader brought to my attention a report written by former Secretary of Commerce Robert Shapiro showing that reforming interchange fees would create almost 242,000 new jobs in the United States.
An area of the report that’s particularly noteworthy:
“…an estimated 54 percent of lower and moderate-income American families pay these prices without receiving the benefits of any credit card.3 Moreover, some 59 percent of higher-income card holders receive rewards financed by these fees, compared to 25 percent of lower-income card holders and 39 percent of those with moderate incomes.4 As a result, these arrangements force those without cards or who carry cards with no rewards to subsidize the rewards which largely go to higher-income people.”
Credit card companies are famous for making huge profits from borrowers – typically of lower socioeconomic status – with poor spending and financial habits. Although other cardholders could be subsidizing my credit card points and airline miles, much of the cost of these reward programs are also paid by retailers through the interchange fee.
The study also found:
“…the interchange fees add approximately 1 to 3 percent to the price of virtually everything Americans purchase, and an estimated 56 percent of these additional costs are passed along to consumers in higher prices.”
As the use of cell phones, broadband internet, laptops and other technology increases, we have seen the prices of these products decline. This has not happened with interchange fees. Even though we have seen greater use of credit and debit cards over the past ten years, the cost of interchange fees has not decreased but in many has cases increased.
Hopefully, Senators Snowe and Collins will look into any efforts to reform interchange fees.
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{ 3 comments… read them below or add one }
I hope you have reached out to Senator Snowe’s and Senator Collins’ offices with both a phone call and an email to encourage them to lead these efforts to reform interchange.
This is not necessarily correct, businesses do not have to accept credit cards, they can accept cash, many retailers and mom and pop businesses agree that they will pocket the cost savings from a lower interchange fee.
While its true that visa and mastercard may have monopolistic behavior , the giant retailers want a discount, this will increase annual fees to the consumer, reduce rewards, while giving merchants a sweetheart deal of guaranteed payments, increases business, and not having to deal with costs of transporting cash, as well as international and global marketing.
The national retailers are the same who were against the minimum wage, so its pretty hypocritical that they would want to cut interchange fees, already discounted rates exist and cash discounts are allowed off the advertised price although surcharges may not be.
Look at Australia , consumers did not necessarily profit, merchants were allowed to charge surcharges, and people may get confused as to to which cards are accepted, qantas is an example of what happens when merchant behavior occurs.
Of course one could make the argument that credit card companies would not necessarily pass on interchange fees benefits and and fees to the consumer, but clearly neither would the merchants, however with rewards cards and other bonuses as well as a balancing act in which consumers have rights and protection against credit card fraud (which must be absorbed by the credit card company and the merchant still gets paid), and then dispute power if an item does not arrive in the agreed condition , or damaged, missing, wrong device, wrong service, etc.
You must be careful and cautious as to what the issue may really be at hand here, a lot of times its one side against the other.
Dear Fact Checker,
I guess you wouldn’t mind the banks taking 3 percent of your gross wages for direct deposit. Let me ask you the following questions ? The bank take 2-3 percent of my credit card sales, about 15 percent of profit yet what was their investment, do they work 80 hours a week at my store, sell my product by making 50 cold calls a day, do they unload the product in the warehouse, do they deliver the product, how about service it, do they listen to my customers complaints, and on and on. No they take my deposits loan them out, charge me fee on my credit line above the interest charges. The risk they take on is mitigated in the interest fees they charge card holders. I believe these processing fees are the ruin of small business. The banks were just bailed out by the taxpayer and they continue to screw our country.