The Interchange Fee: The Most Expensive Credit Card Fee of All

While you've perhaps never heard of it before, chances are, you pay at least one interchange fee every day – certainly every time you use a credit card. It's what merchants have to pay for the privilege of accepting credit cards, and on average, it amounts to 2% of every charge, including sales tax.

You know what happens to a charge like that – it gets passed on to us. According to R. K. Hammer Investment Bankers, we paid $33 billion in interchange fees in 2007. That's more than we paid in penalty fees (18.1 billion), cash advance fees ($8.2 billion), annual fees ($3 billion), and miscellaneous fees ($.7 billion) – combined!

Surprised you haven't heard more about this costly fee? The National Retail Federation says that's because "Visa and MasterCard do not disclose the charge on monthly statements and prohibit retailers from showing it on receipts." It estimates that we spend about $350 per household each year on interchange fees.

"Visa and MasterCard work with banks that issue their cards to unilaterally set the rates, a process that retailers see as illegal price-fixing," explains AP business writer, Christopher S. Rugaber, in an excellent article on this subject. He reports that the credit card companies have recently decided to leave their interchange fees where they are, which disappoints the retailers, who think the fees should be lowered. 

Enter Congress
Representatives John Conyers, D-Michigan, and Chris Cannon, R-Utah, have introduced the Credit Card Fair Fee Act of 2008 to "help level the playing field for merchants and retailers negotiating with banks for the cost of certain fees, and ultimately reduce the costs of everyday goods for consumers." If it passes, issuers would have to negotiate fees with merchants. If they can't agree, a three-judge panel would decide what the interchange fees should be.

Both sides have been lobbying heavily. Rugaber dug through the public disclosure forms and discovered that the Merchants Payments Coalition spent $500,000 last year to lobby Congress on the interchange fee issue, while the Electronic Payments Coalition, which includes Visa and MasterCard as well as American Express and major banks, spent $320,000.

I'm not sure this legislation is the way to go, but I'd sure like to see the interchange fee lowered. I'll be looking into this issue on all of our behalf in the coming weeks, and welcome your thoughts on this hidden cost of using credit cards.

Nancy Castleman – Co-author of "Invest in Yourself: Six Secrets to a Rich Life" and founder of Good Advice Press. Nancy has spent the last 23 years teaching people how to get out of debt, save money, and live better on less. She writes on all these subjects for CreditBloggers.com.

Comments

[bluestate]

Hey Nancy,
I've actually done some work on this issue in the past with the MPC and definitely agree with you that its surprising that such a huge fee as interchange has largely been off everyone's radar for so long. At a minimum, it is good that Congress is looking into it so that there will be more light shed on the issue which is currently very lacking in transparency.

My main problem has been that the fees seem to hit both merchants and consumers simultaneously - forcing businesses to raise prices to make up the loss caused by the fee which then gets pasted onto everyone. Unfaircreditcardfees.com has done a pretty good job of providing info on its effects. There's been some good coverage of interchange fees recently in the WSJ in addition to the articles you posted as well that I've seen.

I look forward to any more coverage you might have on the issue since I think that the current system is broken and that there is a rare chance for positive legislation on this issue that benefits both small businesses and consumers at the same time.