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WASHINGTON, D.C. -- At the hearing held by the Senate Judiciary Committee yesterday, Bill Douglass, former NACS chairman, told committee members that the interchange fees "hurt my customers and hurt my business."
Douglass' comment could sum up the opinions for opponents of the interchange fees, which included Kathy Miller, owner of The Elmore Store, located in Elmore, Vt. Miller told committee members that as she made more than $68,000 worth of credit card transactions in 2005, but more than $4,000 came from her pocket to cover associated expenses. Because of this "maintenance doesn't get done as it should, and payroll gets cut," she told committee members.
"We just keep absorbing the fees, trying to survive," she said. "We are trying to keep the doors open."
Interchange fees is a percentage of cost added on to every transaction that credit card's banks charge merchants when the card is used. The fee varies with each type of card, but averages around 2 percent a transaction.
NACS estimated that as a whole, the industry paid $5.25 billion in credit card costs last year -- up from $3.80 billion in 2004 -- while industry profits totaled $5.8 billion in 2005, CSNews reported yesterday.
Douglass, who also is the CEO for Douglass Distributing, operator of 15 convenience stores, told members that the credit card's interchange fees is his third largest cost, only exceeded by labor and rent. The average c-store paid $40,000 in credit card fees in 2005, but only made $42,000 in pre tax profits, Douglass added. "It gives you a sense of just how broken this market is," he said.
Douglass said that 60 percent of gas transactions are paid by credit or debit cards. "I have to take these cards, or go out of business," he said.
"Visa and MasterCard saying retailers don't have to take the cards is like … saying you don't need a phone." Not allowing credit transactions "ignores how business is done today," he added.
When the committee asked Miller about the practicality of disallowing credit card transactions in her stores to avoid the high fees, she said that credit card transactions "Is what customers expect – it's what I need to do to keep my business." She added "Nine times out of ten that option is not there."
"Consumers are king, and consumers like their plastic," said Timothy J. Muris, former chairman of the Federal Trade Commission. For that reason, cash discounts or surcharges will not be an acceptable solution to combat the costs of high interchange fees. Douglass said that surcharges "would just drive the customers off."
Surcharges, which are not legal, "economically should be the same equivalent [to cash discounts] to a merchant looking to drive people to cash. However, we don't like people using our cards and feeling like they are being discriminated against," said Joshua L. Peirez, group executive of Global Public Policy and associate general counsel for MasterCard Worldwide.
Retailers are not the only people who suffer because of interchange fees. An average family will pay $230 per year due to interchange fees, even if they never use a credit or debit card, according to Douglass. This is because the high fees associated with the transactions force store owners to raise prices for everyone, to recoup those losses, he said.
"Interchange acts as a hidden sales tax on U.S. commerce, raising both merchant costs and ultimately the price of goods and services sold to consumers," said antitrust attorney W. Stephen Cannon.
Cannon spoke on the behalf of the Merchants Payments Coalition (MPC). The MPC was created in 2005 to challenge rising interchange fees and represents 2.7 million stores.
He told committee members that credit card companies such as Visa and MasterCard have a network of banks that violate anti-trust regulations when they price fix according to their interchange rates, resulting in anticompetitive actions.
In defense, Joshua R. Floum, executive vice president, general counsel and secretary for Visa said that credit card fees are a balance. If fees are too high, merchants will not accept the cards and then customers will not want them.
Peirez also said that the bank networks are "a legal joint venture, which has the right to set prices."
Cannon added that because the interchange fees are built onto the price of items, and are not disclosed to customers, its represents a hidden tax on the economy.
Miller noted that the banks have told her that it is illegal for her to post the fees associated with credit card transactions for her customers.
"The average consumer has no idea that this fee is imposed every time they make a purchase," Cannon said.