Published on: February 16, 2006
In appearances yesterday before the US House of Representatives Subcommittee on Commerce, Trade and Consumer Protection, Food Marketing Institute (FMI) CEO Tim Hammonds and National Association of Convenience Stores (NACS) CEO Henry Armour addressed the high cost of interchange fees charged by credit card companies.
According to Hammonds, “Fees paid by FMI members to the card companies have increased roughly 700% over the past 10 years as a result of this combined growth in rates and volume. By comparison, even the cost of a gallon of gasoline at the pump, where consumer outrage is palpable, has increased ‘only’ 100% since February 12, 1996. We say ‘only’ because that’s a huge increase, but it’s not 700%. If consumers had full information on the rates and fees associated with their plastic cards, we would see the same level of outrage we now see over gasoline prices. Consumers already have some experience with this. They know and resent the fees they are aware of that credit card companies are charging them such as late fees, over-the limit fees, zero balance fees, and inactivity fees. There is a whole class of fees that consumers don’t know about. These include interchange fees, dues and assessments, risk fees, access fees, base rate settlement fees, surcharge fees, switch fees and transaction fees. Interchange fees are the most costly: In 2004 alone, Visa, MasterCard and their member banks collected $27.6 billion in interchange fees.
“Consumers don’t know about these fees because merchants are prohibited from disclosing them. These hidden fees are ultimately reflected in the retail price of every product consumers buy. Consumer anger would increase even more if they learned that this prohibition against disclosing the fees is included in a 1,200-page book of Visa operating rules that merchants must abide by but can’t even have a copy for themselves! This lack of disclosure and lack of competition in these fees are contrary to everything this committee has worked to achieve.
“The solution to this complex problem is relatively simple.
• First, shine some light! Require the card companies to disclose their operating rules on a web site and file a copy with the Federal Trade Commission. Small businesses should no longer have to guess the fees they are being charged or the rules they have to follow — rules that can seemingly be changed at a whim.
• Second, card companies should be required to charge a fair price that reflects the actual cost of their services, but should not be allowed to subsidize the expensive marketing programs and promotional schemes that benefit only the most privileged few.”
Armour agreed, outlining four fundamental problems with the current interchange market. “First, because of the market power of the card associations, retailers have no choice about whether they accept cards. Second, the card associations exploit their market power by driving up fees and by veiling these fees and their rules in secrecy. Third, these fees are bad for consumers – particularly some middle and many lower income consumers who do not have easy access to credit and debit cards. And fourth, consumers in the United States pay much more for interchange than other comparable countries.”
And, Armour said, “It’s not just consumers who are left in the dark; Visa and MasterCard refuse to fully disclose their operating rules to retailers. It is remarkable that they make retailers agree to abide by all of their operating rules in order to be able to accept their cards, yet they won’t let retailers see those rules. I find the lack of transparency by Visa and MasterCard to be outrageous.”