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    Study: the High Cost of Credit Card Convenience

    "Merchants get nothing" out of interchange fees, according to new study.

    WASHINGTON -- A report by Chicago-based Diamond Management and Technology Consultants Inc. found that the cost of interchange fees assessed by credit card companies does not add up to the benefits it provides. This confirms accusations by the Merchants Payments Coalition (MPC) that retailers suffer from programs that make up almost half of the $30.7 billion in fees that the two largest credit companies -- Visa and MasterCard -- charge in the U.S. annually.

    The report, titled "A New Business Model for Card Payments," stated that processing fees -- the reason for interchange fees in the first place – account for only 13 percent of the costs assessed. The study also found that 44 percent of the fees go to reward programs, "but merchants get nothing out of these programs," the report stated.

    It also found that since 1999, the fees have continually risen. "The card associations and their bank issuers are pursuing revenue growth through higher interchange rates," the report stated. "Given the merchants' lack of perceived value for what they pay, the situation is clearly unstable," adds the independent report.

    The study confirms the stance that the MPC has taken over the interchange fee issue. "This report corroborates the message that merchants have communicated to lawmakers over the past year -- that interchange fees are far, far higher than the actual benefits delivered to both merchants and the vast majority of consumers," said MPC chairman Mallory Duncan, senior vice president and general counsel for the National Retail Federation. "Among other things, this fee is fueling the flood of credit card offers stuffing consumers' mailboxes."

    He continued: "Consumers are led to believe that rewards are free, but this study shows consumers are being charged for these rewards whether they ever get to use them or not." The study found that the interchange fees, which fund the rewards, cause an increase in prices, which affects both credit card users and non-users.

    In addition, the report also noted that merchant dissatisfaction with interchange fees raises concerns with the credit card business model and could lead to the breakdown of the current system in the future.

    The MPC, founded in part by NACS, is composed of 20 trade associations representing retailers, restaurants, supermarkets, drugstores, convenience stores, gas stations, on-line merchants and other businesses that accept debit and credit cards. It is fighting for a more competitive and transparent card system. The coalition's member associations collectively represent about 2.7 million stores with approximately 50 million employees.

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