Americans are being forced to pay significantly higher swipe fees whenever they use their credit cards than any of their peers in the industrialized world, according to a report by the Merchants Payments Coalition.
The report, released Thursday by a coalition of retailers, supermarkets, drugstores and other businesses, found that Americans currently pay about $2 in "interchange" fees for every $100 they spend using credit cards. The fee is actually paid by retailers, though consumers feel it in a higher retail price. This rate is twice that charged in the U.K. and New Zealand, four times the rate levied in Australia and more than six times the cross-border rate charged in the European Union, the study says.
"If we paid the same low credit- and debit-card swipe fees as consumers in Australia pay, then the net benefit for American consumers would have totaled $125 billion over the last four years," the report says.
Banks began charging interchange fees in the 1960s to cover the cost of processing credit-card transactions. "But even as technology has dropped that cost dramatically, banks and credit-card companies have pushed swipe fees higher and higher, turning it into a cash cow," the report notes. "For many businesses, swipe fees are now their single highest non-labor operating cost."
The merchants contend that if interchange fees are lowered, they would pass on the cost savings to consumers through lower prices for goods at least that's the theory.
The report is the merchants' latest push to pressure the Federal Government into passing legislation aimed at either lowering interchange fees or at least allowing merchants to negotiate the rate directly with banks and credit-card networks.
The report cites reforms made to interchange fees in Australia, New Zealand and the E.U. as proof that lowering swiping fees are "not only pro-business and pro-consumer, but also a painless way to put more money into the economy during a recession and to stimulate spending."
When the Australian government started reforms in November 2003, fees fell 0.45 percentage points, and a 2007-08 review of the reforms indicated that the changes had saved Australian merchants $1.1 billion [AU] that year, the coalition's report said.
However, Piper Jaffray analyst Robert Napoli says it's merchants not consumers who will benefit from lower fees. "To suggest that American consumers could have saved $125 billion is very misleading," he says. "Interchange fees are paid by the merchant, and there have been studies done in Australia that said that consumers have not saved a penny by lowering interchange rates that the merchants have not reduced prices at all."
He contends that consumers could actually be hurt by lower fees if banks decide to scrap rewards programs, raise interest rates on credit cards or reinstate annual credit-card fees to offset the lost interchange-fee revenues.
On the flip side, though, he says interchange legislation that lowers rates could mean credit cards will be accepted by more merchants and markets that in the past didn't sign up because of the higher interchange fees.
JPMorgan analyst Tien-Tsin Huang says lower interchange fees could also pose a risk. "You could cut it by 20 basis points, but my worry is that if you do that, as [security] innovation goes down, fraud goes up," he says.
Merchant groups have been lobbying the Obama Administration on the issue for many months. Bills have been introduced in the House and Senate that, if passed, would allow merchants to negotiate their interchange fees directly with banks and credit-card networks. The Senate's version, introduced by Senator Richard Durbin, even calls for a panel of three electronic-payment-system judges to step in if merchants fail to reach a negotiated agreement.
In the meantime, the Government Accountability Office is conducting a six-month study on credit-card interchange fees, which is expected to be completed in November. Analysts believe it's unlikely any bills will be passed on the issue until this report is released. A GAO executive was not immediately available for comment.
Merchants have also launched an antitrust suit against the banks and credit-cards companies in connection with interchange fees. Huang believes it's likely that the issue will eventually be resolved through litigation rather than legislation.