Tuesday, June 26, 2007

Credit card interchange fees

At least one group is concerned with the rising credit card fees, in this case a website called Unfair Credit Card Fees. The site focuses on a lesser known fee that is charged every time you swipe your plastic: the interchange fee.

Most people, I think (though the group disagrees) know that the card companies get a cut of the transaction every time you swipe your card. Honestly, until I had researched the subject I always thought it was a set dollar amount to cover the cost of handling the transaction, or a monthly service charge for the equipment. For example every time you swipe your card, the merchant would get charged $0.50 or something. This made sense to me because often small independents would refuse electronic transactions under $5.00. Obviously if they are getting charged a fixed amount, they want to minimize the percentage of the fee compared to the purchase price. Not so. It is in a fact a % of the total sale, roughly an average of 2%. According to other sources, cards like Discover and AMEX charge even more, which would explain why many merchants outright refuse them.

This confuses me a bit as to why merchants refuse transactions under $5, unless there is also a minimum to this fee? Ie, 2% of the charge or $3.00, whichever is greater. the site doesn't say, but it does have some interesting information as well as some resources if you want to be active in fighting these fees.

Americans pay a hidden fee on virtually every transaction they make, whether they use a credit card or not, costing consumers tens of billions of dollars a year.

That's quite a bit of money. This hidden fee costs us around 2% of our transaction total, which depending on how many new retail goods you buy can add up to quite a lot over a year.

Even though credit card use is at an all time high in the U.S., credit card interchange fees keep going up...In 2001, Visa, MasterCard and their issuing banks collected $16.6 billion in credit card interchange fees. By 2005, these fees increased to $30.7 billion

It is interesting that these fees continue to increase, especially when credit card companies are already profiting from the insane late fees, overlimit fees, interest rates, and annual fees it charges directly to consumers.

Americans among the highest credit card interchange fees in the world - averaging close to 2 percent for credit card and signature debit transactions, compared with only 0.7 percent in the United Kingdom and 0.55 percent in Australia.

And this was even more interesting. The UK is only charging half a percent for these transactions while we pay 2%. Why?


Triston said...

Hi, I actually work with this group and thanks for the link to our website, btw. Just wanted to clarify a couple of things. The transaction fee (interchange fee) is a combination of a percentage and flat fee, which makes budgeting and forecasting difficult. Second, merchants are technically not allowed to require a minimum purchase so when you see those signs that read: $5 minimum credit card purchase required...they are in violation of the card agreement and you as a consumer can still use your card. However, can you blame them for attempting to avert a business loss?

Well, thanks again for your support. Congress is supposed to hold a couple hearings in July and interchange needs to be discussed.

Beyond the Consumer said...

Thanks for the comment. I hope that your site keeps us updated on the congressional meeting (maybe they will webcast it?).

I do not blame them for imposing the minimum transaction, and I am more than happy to oblige. Even if they are violating the card agreement, couldn't they deny the transaction based on their "we reserve the right to refuse service to anyone" sign? - in this case anyone being small dollar credit card users :)

Triston said...

I just got word that there will be a House hearing on interchange fees on July 19th. I will get you the details as soon as I get them but it should be made available via webcast.


Aneace Haddad said...

Interchange is actually becoming a major battleground in the wars between Visa, MasterCard and American Express. This is heating up quite fast. We should see lots of changes on this front as MasterCard eases into becomeing a true for profit organization, and as Visa gets through its IPO. Both are going to be driven by shareholders to grow rapidly, and the best way to do that is to offer banks higher interchange. Check out my blog on this subject if you want more details.