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."
So interchange fees are often used to fund the rewards programs that come with certain cards. That means that far from only cutting into junk mail, limits on interchange fees could lead to fewer rewards for consumers and higher fees in other areas. "It stands to reason that somehow issuers will find ways to make up the revenue" if their money stream from interchange gets slashed, says Hardekopf.
Banks would also be affected in different ways, and some small businesses could suffer as a result. It is more expensive for small neighborhood banks and credit unions, for example, to provide credit transactions because they get fees from much fewer transactions than the big banks. John Blum, a vice president at a credit union in Virginia Beach, Va., testified before the House Judiciary Committee that credit unions "will find it more difficult than larger institutions to offset the losses from a cap on interchange fees, and as a result, some credit unions will be unable to offer credit or debit cards, or exit the market entirely." That concern over less access to credit caused the National Black Chamber of Commerce to oppose a bill regulating interchange sponsored by Rep. John Conyers of Michigan; NBCC CEO Harry Alford wrote in a letter to Conyers last year that "because access to adequate capital remains a problem for black-owned businesses, those businesses are more likely to use credit cards and less likely to use bank loans to start or acquire their businesses."
Myth #2. We know where the savings would go if interchange fees were regulated. Proponents of regulation like 7-Eleven argue that interchange fees lead to jacked-up retail prices, costing consumers a bundle. 7-Eleven franchisees emphasized that argument to get 1.66 million signatures from customers on a petition calling for the end of "unfair" credit card fees. But opponents like the Electronic Payments Coalition responded that lower fees would only mean more money for the stores, not consumers. "How many would have signed a petition that said, 'Sign here if you want to pay more to use your debit or credit card, so we can profit?' " the coalition asked in a statement.
So who would be the big winner from lower interchange fees—businesses or consumers? In 2002, the Reserve Bank of Australia implemented a cap on interchange fees and also allowed stores to surcharge customers who use cards—policies similar to what is being considered in the United States. After studying what happened in Australia after these reforms were put in place, the U.S. Government Accountability Office found that "no conclusive evidence exists that lower interchange fees led merchants to reduce retail prices for good."
But the debate doesn't end there. Just because consumers did not get a windfall in Australia does not mean the stores pocketed the money. Adam Levitin, a professor at Georgetown University Law Center, says that the Australia example is not conclusive evidence one way or the other. "It is simply too difficult to separate the impact of interchange out from all of the other factors that impact prices," he says. "There could be savings from interchange that are offset by increased costs from other factors—say, the cost of electricity."
Myth #3. Limiting fees is the only answer. While 7-Eleven's petition is entitled "Stop Unfair Credit Card Fees," there are other proposals on the table that could alleviate the burden without directly prohibiting fees over a certain level. The National Small Business Association (NSBA), for example, argues that concern over interchange fees for its members could be addressed if payment agreements between credit card issuers and merchants could become more transparent. Currently, when a business owner signs an agreement to be able to use credit card payment in his or her store, the agreement restricts the owner from disclosing the size of the fee or from giving customers who pay in cash a discount. The NSBA's Keith Ashmus argues that small-business owners have no choice but to accept these agreements. "As a small business, you're taking credit cards because you have to," he says. Congressman Peter Welch of Vermont has proposed a bill that would force credit card companies to disclose their interchange rates and terms, and also allow businesses greater flexibility in pricing.
Levitin argues that it makes sense for different forms of payment to be allowed different pricing. "Credit card networks' restrictions on how merchants can price their goods and services, as well as the bundling of rewards programs, result in inefficient use of payment systems. Consumers use credit cards more than they otherwise would," he says.
Such a change, however, wouldn't do much to benefit customers who like to keep cash to a minimum. They could be stuck paying hefty surcharges because they can pay only with plastic.
But it's not just Washington that could do something to reduce the burden of interchange fees. States and localities could do it too. "The higher state and local sales taxes multiplies the problem," says Ashmus. How? The interchange fee is not just a percentage of the listed price of each transaction—it's that price plus any sales tax. So a 2 percent interchange fee becomes a higher dollar value out of the pockets of merchants if a substantial sales tax is in place.