Interchange Fees: The Billion-Dollar Fight For Control of Your Wallet

OK, So Who Should Pay?

So the question becomes: Who should pay for that convenience? Retailers have a surprising answer: Nobody. For decades, retailers paid small fees to process paper checks. Now they pay significantly more money—$1 billion a month collectively, according to the National Retail Federation—for a system that should cost less than paper checks.

That doesn’t make much sense, merchants say.

“A debit card is not a product. It’s just a withdraw device, like a paper check,” says Mallory Duncan, chief attorney for the federation. “And since debit cards cost less to process than checks, they should cost less to use.”

But instead of going down, interchange fees are going up. The Federal Reserve estimates that interchange fees cost consumers $24 billion in 2006; the Merchant Payments Coalition reported that the amount in 2010 was closer to $50 billion. Either way, the total amount spent with debit cards is growing by 20% a year, the Fed found.

As the networks expand and become more efficient thanks to higher sales volumes and faster technology, one might expect Visa and MasterCard to compete with each other by lowering the prices they charge retailers. That hasn’t happened. Interchange fees have stayed roughly stable over time, and fees on premium cards continue to grow, according to the Fed.

How is that possible? Visa and MasterCard control 70% of all debit transactions. They use that dominant market power to dictate prices to merchants, the retailers say, keeping interchange fees (and retail prices) unnaturally high.

“They don’t want to compete,” Duncan says. “They want a cartel. They want monopoly pricing, because that’s what they have now and it’s very profitable.”

Consumer advocates agree.

“It’s pretty obvious that this is a broken market,” says Mierzwinski. “You have a duopoly of Visa and Mastercard controlling the entire payment market, and I think everybody pays more at the store and more at the pump because of it.”

Retailers have repeatedly sued Visa and Mastercard for running a de facto monopoly, and they lost every time, Wexler points out. “Just because you have large players does not equal a duopoly,” she says.

The real issue, according to Wexler, is that debit card networks provide retailers a valuable service, one that brings them more customers, encourages those consumers to spend more money per transaction, and lowers retailers’ labor and banking costs.

And now the retailers are trying to weasel their way out of paying for it, Wexler says.

“The retailers don’t want to pay their fair share of this system,” says Wexler. “They want us, the consumer, to pay for it. And that’s not fair.”

Not All Consumers Are Treated The Same

Arguably, consumers already pay for the debit card swipe system, since retailers pass on the fees in the form of higher prices on food, gasoline and other goods. This forces people who don’t have bank accounts or debit cards to subsidize people who do, according to a report by the Boston branch of the Federal Reserve.

About a quarter of Americans don’t have bank accounts, according to U.S. PIRG. These people tend to be from low- to moderate-income families. Currently they pay higher prices for milk, gas and most everything else they purchase, helping to support a payment system they don’t use.

“Cash buyers are subsidizing card buyers, who generally are more affluent,” Mierzwinski says. “That doesn’t make much sense.”

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Meanwhile, banks use revenue from interchange fees to pay for rewards programs and free checking offers, according to the Boston Fed. The best rewards programs often are targeted at the most valuable banking customers, usually those with higher incomes.

“Free checking is the primary mechanism banks use to steal customers from their competitors,” says Travis Plunkett, lobbyist for the Consumer Federation of America.

The result, the Boston Fed found, is that the average low-income family earning $20,000 or less pays an extra $21 a year in interchange fee-related costs at the checkout counter. Meanwhile, the highest-income families, who make $150,000 or more annually, receive $750 a year in rewards bonuses and waived checking fees thanks to the current system.

Lower-income people “are subsidizing this anti-competitive system. That’s simply unjust,” says Plunkett.

Even if the system is changed, there’s no guarantee that retailers will pass the savings onto consumers, low-income or otherwise, Wexler says. She points out that Home Depot’s report to investors in the fourth quarter of 2010 estimated the company would receive an extra $35 million a year if interchange fee costs are shifted from retailers to banks.

The Fallout on Banks »

Image by Håkan Dahlström, via Flickr