Interchange costs exceeded $26 billion in 2004 — more than penalty fees, annual fees and cash-advance fees combined.
"American consumers pay a hidden interchange fee on virtually every purchase," said Tim Hammonds, FMI president and CEO. "The cost is rising fast as credit card use increases and card companies compete by raising the fees to entice banks to issue their cards. The retailers and consumers who pay the fees have no say in this practice."
"In a truly competitive market," he said, "companies offer consumers the best value for their dollar. We see this principle at work every day in the supermarket industry, where Americans enjoy the lowest prices in the world. Consumers deserve the same value when they choose to use their credit cards."
The committee learned firsthand how these fees harm consumers and small businesses from Kathy Miller, owner of the Elmore Store, in Elmore, VT, testifying on behalf of FMI and the Vermont Grocers’ Association.
In 2005, Miller’s store handled $58,500 in plastic transactions and paid $4,400 in credit card fees at a rate of 2.65 percent plus 20 cents per sale. "Since I told my customers I was going to Washington, DC, to testify on this issue, I can’t even tell you how many of them were unaware of these hidden fees," she said to the committee.
"They swipe their cards and think all is 'free' because there is 'no charge' to them at all. Obviously, we lose money on many small transactions and too much on others, so we have to raise prices," Miller testified.
Interchange fees are assessed on every credit and debit card transaction, averaging close to 2 percent. Retailers are forced to build them into the cost of all transactions because card company rules prohibit surcharges on plastic payments and effectively prevent retailers from offering discounts to consumers who pay by cash or check. Credit card company rules make it virtually impossible to inform consumers about these fees.
Interchange cost increases averaged 700 percent among FMI members over the past 10 years, Miller testified. "These increases occurred despite the fact that the technology infrastructure is already in place and the volume of transactions has grown exponentially, providing economies of scale."
"In other areas of my business or any business," she said, "as technology advances and volume increases, prices go down, or at least remain stable. That is not the case with interchange fees because there is no competition."
American consumers pay among the highest interchange fees in the world. Investigations by central banks and competition commissions in the European Union, United Kingdom, Australia and elsewhere found that the fees far exceed the actual costs of payment services. These findings are prompting governments around the world to order that the fees be disclosed to consumers and reflect the actual cost of providing the service.
As a leading member of the Merchants Payments Coalition, FMI is seeking transparent, cost-based interchange fees in the U.S.