By Michelle Singletary
Thursday, May 28, 2009
The Government Accountability Office has been ordered to study the use of credit by consumers, and in particular the effect interchange fees have on consumers and merchants.
Many people may not be aware of these fees, but for lenders, merchants and consumer advocates, the fees are the next controversial credit-related issue Congress may take up.
An interchange fee is paid by a merchant's bank to a customer's bank or credit union when the business accepts purchases by credit or debit cards. Typically the fees are 1 to 2 percent of the total cost of a purchase. For example, if a consumer buys $100 of merchandise or services, the interchange fee paid by the merchant could be $2.
This may not seem like a lot of money, but multiply that by the millions of people making electronic purchases and it's not chump change. Moreover, everybody pays, whether you use plastic or not, according to consumer advocates and retailers. The interchange fees result in higher prices for everyone, including those paying with cash.
The Credit Card Accountability, Responsibility and Disclosure Act that President Obama recently signed into law includes a provision to investigate the fees that businesses pay to allow their customers to use credit. The idea is to provide more transparency to consumers.
Demanding that credit card companies give more information about interchange fees would put them on par with food producers who are required to provide nutritional information on packaging. The nutritional details are meant to help people make healthier choices. And yet Americans are fatter than ever.
The same can be said about our appetite for credit.
Yes, with more information some have used credit better than others and haven't been trapped by fatty interest rates and fees. Still, this country's collective unhealthy devotion to credit has helped push us into this recession, increasing the cost to all.
As profit margins narrow, coalitions of business owners have been mounting campaigns to reduce interchange fees. Several members of Congress have introduced legislation intended to help businesses better negotiate the fees.
The moaning merchants claim they are fighting for their customers. I'm not so sure. Isn't it more likely that if their margins are tightening they'll just pocket the amount saved on lower fees?
Bankers argue that the fees are necessary as part of the costs to run the credit system, including providing reward programs. They say consumers will suffer if they don't have the convenience of paying with plastic.
Merchants and bankers are serving their own interests in encouraging or opposing any legislation providing more transparency on interchange fees.
When merchants accept credit cards, people spend more than if they pay for their purchases with cash (a fact backed up by a number of academic studies).
Lenders fear that if outrage over the fees grows, Congress and the president may roll back the interchange fees or cap them.
The GAO issued a report last year on the impact that interchange fees have on the federal government. Consumers increasingly use credit and debit cards to make payments to federal, state and local governments for such things as park admission fees, driver's licenses and income taxes. The investigative arm of Congress found that by accepting credit card payments, federal agencies realized some significant benefits despite having to pay interchange fees. The benefits included fewer bad checks and cash thefts.
The GAO also said that when it examined data from other countries where authorities have successfully rolled back interchange fees to less than 1 percent of transactions, consumers didn't necessarily reap the benefits.
"No conclusive evidence exists that lower interchange fees led merchants to reduce retail prices for goods," the GAO reported. "Further, some costs for card users, such as annual and other fees, have increased."
The GAO is supposed to report its findings to Congress in six months, along with any recommendations for legislation. The agency is charged with examining whether merchants are restricted from revealing the fees to customers and to what extent merchants are permitted to discount for cash purchases. It will investigate the ability of merchants of varying sizes to negotiate interchange fees and exactly what costs are incorporated into the fees.
Given the credit card industry's history of unfair and predatory practices, the GAO study is a good idea.
You could argue that merchants should disclose how much of a product or service is marked up because of a credit or debit transaction. But I wonder, even if more consumers knew about these fees and were given the widespread option of paying less for their purchases if they used cash, would they part with their plastic?
I don't think so.
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