FMI Asks Fed to Investigate Fast-Rising Electronic Payment Fees, Caps on Those Fees and Disclosure of Costs to Consumers

WASHINGTON, DC — August 2, 2004 — The Food Marketing Institute (FMI) is calling upon the Federal Reserve to investigate the fast-escalating costs of fees for electronic transactions, to explore ways to cap these costs and to disclose them to consumers, according to comments filed recently with the nation’s central bank.

Among the reasons for these requests, FMI cited the following:

• The cost of electronic payments is one of the fastest growing and least controllable costs.


• There have been 11 credit/debit rate increases in the last 12 months with still more expected this year.


• PIN debit fees are up 267 percent since 1999.


• Electronic payments volume has increased over 500 percent from 1989 to 2000, and continues to grow dramatically.


• Card associations collected $29.2 billion in 2003 on interchange fees, which banks impose on retailers for all electronic transactions.


• The current interchange fee model is inverted from normal competitive market models — more volume means more cost; volume cannot be used to lower costs; merchant fees are invisible to consumers.

     

According to a 2003 report by the Tower Group Food, food retailers handle over half of all PIN-based and signature-based debit transactions (credit cards that work as checks). “At the same time,” FMI commented, “the cost of accepting these cards has been skyrocketing, often exceeding the 1 percent net profit margin of the typical grocery store.”

FMI noted that “financial institutions are intentionally trying to switch consumers to signature debit, which is slower, less secure and significantly more expensive for retailers and ultimately for consumers.” This trend is “contributing to the growing national problem of identity theft. Thieves can use signature debit cards to empty consumer checking/saving accounts without needing a PIN.”

Retailers cannot control the interchange fees for signature-debit transactions, FMI said. “Because financial institutions are able to charge retailers so much more for signature debit, they have a perverse incentive to drive cardholders to the more costly alternative for retailers and more fraud-prone for consumers.
     

“Since signature debit transactions have a higher fraud risk than PIN-based debit transactions, banks should encourage their customers to use the more secure PIN-based debit payment type.”
     

FMI encouraged the Federal Reserve to examine methods to regulate fees, stating that “the United Kingdom, Australia, Israel and the European Union have initiated actions such as caps on fees, changes in operating rules, antitrust/fair trade investigations, studies and legislation.”
     

FMI filed the comments on July 23, 2004, and is drawing upon the expertise of its Electronic Payments Systems Committee in researching these issues and working with the Federal Reserve.

Note: A copy of the comments is available at the Web site —
http://www.fmi.org/newsletters/uploads/CommentsFiled/Debitcomments7-04.pdf