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WASHINGTON, D.C. -- The Government Accountability Office (GAO) came out with a study this week acknowledging that legislation to regulate interchange fees would result in lower prices for consumers.
However, the GAO also said the regulation would be "challenging to implement" and could result in credit card issuers cutting back on the availability of credit and offering fewer reward cards -- which currently cost merchants even more in fees than regular credit cards.
Retailer groups were quick to hail the GAO report while also countering claims by banking and credit card lobbyists that the report proved that consumers would be harmed by credit card reform.
"If interchange fees for merchants were lowered, consumers could benefit from lower prices for goods and services, but proving such an effect is difficult, and consumers may face higher costs for using their cards," the GAO wrote, according to a report by The Wall Street Journal, which noted "card issuers, faced with lower revenue from fees, could trim back the availability of credit. Smaller issuers also may cut back on reward cards."
However, the GAO also pointed out even "consumers who do not use credit cards may be paying higher prices for goods and services, as merchants pass on their increasing card acceptance costs to all of their customers," said the Journal report.
A variety of retailers and retailer-oriented trade associations, maintain that the fees charged by banks result in an increase in the cost of goods. Banks, however, argue that the merchant community is trying to avoid paying its fair share of the burden of these costs.
The Credit Card Interchange Fees Act of 2009 would limit the fees that could be charged to merchants accepting credit cards and allow merchants to give discounts for cash purchases. It would prohibit charging higher fees to merchants when customers use reward cards and would give the Federal Trade Commission authority to review interchange-fee practices, according to the report.
One group formed specifically to push for reform of these so-called "swipe fees" is the Merchant Payments Coalition, which issued a statement saying that the GAO report "confirms many of the most harmful aspects of these unfair, hidden fees. The report shows that the credit card companies and their issuing banks have been misleading the public about their increasing rates and about the benefits of credit cards to businesses. The report also outlines an unfair, anti-competitive system that hurts Main Street businesses and their customers in order to pad the banks' bottom lines, with little relation to the actual costs of processing payments."
NACS -- the Association for Convenience and Petroleum Retailing, has also been leading the charge for interchange fee reform. Said Lyle Beckwith, NACS senior vice president of government relations: "They found that the 10 largest banks have a stranglehold on this market, have used it to raise their fees, which all consumers pay, and that small businesses and low income, cash-paying consumers get the worst deal from this arrangement."
Beckwith continued: "And though Visa and MasterCard claim swipe fees have not been increasing, and that credit card use increases sales for merchants, the GAO report solidly debunks both of those claims. The GAO report should sound the alarm that it is time for Congress to reform swipe fees," he said.
RILA, the Retail Industry Leaders Association, also hailed the report, saying it is "proof-positive that Congress must follow the lead of more than 30 other countries and reform an out of control system that harms merchants and consumers," according to John Emling, RILA senior vice president of government affairs.
RILA issued an extensive analysis of the report on Friday, which stated:
According to the GAO, capping or otherwise regulating interchange fees would benefit customers.
If these measures were adopted here, merchants would benefit from lower interchange fees. Consumers would also benefit if merchants reduced prices for goods and services, but identifying such savings would be difficult. (Summary)
"A significant advantage of capping or limiting interchange fees would be that it would reduce interchange fee costs most directly. The experience in Australia indicates that this option does lower merchant costs and Australian regulators and merchant representatives insist that consumers have also benefited, arguing that merchants in competitive markets generally lower prices." (p. 48)
Because of their overwhelming market share, Visa and MasterCard can raise interchange rates without losing customers.
"Concerns remain over whether the level of these rates reflects market power -- the ability of some card networks to raise prices without suffering competitive effects -- or whether these fees reflect the costs that issuers incur to maintain credit card programs." (Summary)
"Although issuers incur costs for offering cards, concerns remain about the extent to which interchange fee levels closely relate to the level of card program expenses or whether they are set high so as to increase issuer profits. In a competitive market, the price of the product and the cost of producing it would be closely aligned. However, producers with market power -- such as monopolists or those offering goods not generally offered by others -- have the ability to charge high, noncompetitive prices." (p. 21)
"Visa and MasterCard together accounted for about 71 percent of U.S. credit card purchase volume in 2008" (p.19)
According to the GAO, claims that interchange rates are not rising are false.
"According to Federal Reserve analysis, total costs of accepting credit cards for merchants have risen over time as consumers use cards more. Part of these increased costs also may be the result of how Visa and MasterCard competed to attract and retain issuers to offer cards by increasing the number of interchange fee categories and the level of these rates." (Summary)
"Visa and MasterCard officials told us that their average effective interchange rates applied to transactions have remained fairly constant in recent years when transactions on debit cards, which have lower interchange fee rates, are included. However, our own analysis of Visa and MasterCard interchange rate schedules shows that the interchange rates for credit cards have been increasing and their structures have become more complex, as hundreds of different interchange fee rate categories for accepting credit cards now exist." (p. 14)
Visa and MasterCard are incentivized to increase interchange fees in order to maintain and grow their share of the credit card market.
"Part of these increased costs also may be the result of how Visa and MasterCard competed to attract and retain issuers to offer cards by increasing the number of interchange fee categories and the level of these rates." (Summary)
"To maintain or increase their market share, networks compete for financial institutions to issue their cards, and the revenues that the issuers earn from interchange fees are an incentive to choose to issue one network's card over another." (p. 20)
Forced to pay higher rates than large merchants, small businesses are hurt most by the credit card industry's unfair practices:
"Although these networks do not make their merchant discount rate information publicly available, a recent survey of 750 small business owners found that merchants with fewer than 250 employees paid an average of 3.2 percent to accept American Express Cards and 2.5 percent for Discover cards, compared with the average merchant discount fee (which includes the interchange fee and acquiring costs) that these merchants reported of 2.3 percent for MasterCard and Visa." (p. 18)
The Department of Justice is once again investigating the practices of Visa and MasterCard:
"DOJ officials reported that they currently have another investigation under way in which they have been reviewing whether some of the networks' rules are anticompetitive. As discussed earlier, these rules include those that prevent merchants from steering customers to other forms of payment, levying surcharges for card transactions, or discriminating against cards by type. DOJ staff told us they have requested information from American Express, Discover, MasterCard, and Visa as part of this investigation." (p. 41)
Another group, calling itself Consumers for Competitive Choice (C4CC), also issued a statement that it was "disappointed, though not surprised, to hear that banking and credit card lobbies were quick to put their own spin on the GAO report findings."
"The big banks and credit card companies would like you to believe that the GAO report said a lot of things other than what it did," said Bob Johnson, C4CC president. "But we would like to set the record straight with the truth. And there is no better way to do that than with information taken directly from yesterday's GAO report proving that increasing credit card transaction fees hurt merchants and consumers."
As one example, the group cites a claim by the Electronic Payments Coalition that the GAO Report demonstrated consumers will be "harmed" if Congress reforms interchange fees.
The truth, according to C4CC, is that consumers will pay lower prices for goods and services.
-- GAO: "[C]onsumers Who Do Not Use Credit Cards May Be Paying Higher Prices For Goods And Services ..." (Government Accountability Office, "Rising Interchange Fees Have Increased Costs For Merchants," 11/09)
-- GAO: "Consumers Would Also Benefit If Merchants Reduced Prices For Goods And Services." (Government Accountability Office, "Rising Interchange Fees Have Increased Costs For Merchants," 11/09)
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