3 Myths About Credit Card Fees for Businesses

High interchange fees are stirring up controversy.

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The grounds of the U.S. Capitol hosted an angry crowd on Wednesday, September 30, as several of the demonstrators, wearing homemade T-shirts, proclaimed themselves as "victims." But these weren't Tea Party protesters, and "big government" wasn't the victimizer. These were franchisees of 7-Eleven's around the country, and they called themselves victims of interchange fees—the fees that a merchant pays to the banks and card networks behind the plastic, every time you swipe your card. The crowd explicitly called for government action to limit these fees.

[For more on how fees affect consumers, see Credit Card Fees: 5 Things You Should Know.]

Why is 7-Eleven taking on credit card interchange fees now? The fees—and the amount of money going to banks from the fees—have increased in recent years. "The cost has tripled since 2000," says Keith Ashmus, the chair of the National Small Business Association. The average interchange fee is now around 2 percent. That might not sound like a lot, but for high-volume, low-profit-margin businesses—like convenience stores or gas stations—it adds up. At the rally on the Hill, Navdeep Bassi, an owner of four 7-Eleven stores in Orange County, Calif., spoke about the costs: "I pay $28,000 in fees a year. That's 30 percent of what I take home." According to the National Retail Federation, interchange fees generated $48 billion for banks in 2008.

[For what a business owner can do about interchange fees, see How to Deal With Credit Card Mumbo Jumbo.]

Now, Bassi wants Washington to act. Although regulation of interchange fees was left out of the major credit card reform act passed earlier this year, that omission has created pressure to pass two bills that directly address the issue, sponsored by several members of Congress, some of whom spoke at the 7-Eleven rally. The bills take two different approaches to limiting the pain of interchange fees: One would allow merchants to collectively bargain with credit card issuers for lower fees, and the other would allow merchants to offer discounts to customers who want to pay in cash—something disallowed by most agreements merchants sign with the credit card companies.

Opponents of regulation have struck back. MasterCard and Visa have both released surveys arguing that interchange fees are needed to fund electronic payments innovations that have made life much more convenient for consumers. But amidst the positions on both sides, several arguments have emerged that distort the nature of interchange. They are myths small-business owners and consumers alike should keep in mind before demanding that Washington act.

Myth #1. Interchange fees are going up just to wring more money out of merchants. Zoe Lofgren, a Democratic representative from California, said in a speech at the rally that the main reason interchange fees are so high is that "banks are greedy." That echoes a sentiment expressed by several proponents of regulating interchange—that the increase in fees in recent years has been the result of several large companies trying to boost profits. The credit card companies have not escaped blame, either—Unfaircreditcardfees.com, a website set up by the Merchants Payments Coalition, argues that "much of the [interchange fee] goes to pay for billions of pieces of unsolicited junk mail annually among other dubious credit card marketing activities aimed at students or those with bad credit histories."

But credit card experts argue that this account does not reflect reality. "I don't think there's necessarily a correlation between the interchange fee and the number of mailings you get," says Bill Hardekopf, CEO of LowCards.com. Since the recession began, "the number of mailings has been down significantly, and the interchange fee hasn't been down at all," he says.

Profits alone are not the driver of higher fees, others say. "Interchange fees are set by Visa, MasterCard, and other card schemes as a feature of each card product that the scheme offers to banks," explains Aneace Haddad, an entrepreneur who works in electronic payments and blogs on the subject. "When a bank is deciding between a Visa or MasterCard logo on their cards, and between one company's platinum card and the other's, it is very tempting to choose the one that provides the highest interchange fees. This competition is what has driven interchange fees higher over the years."

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