Legislator at Law

Posted on Sunday, January 31st, 2010 at 9:44 pm

Most Marylanders know that consumers pay a 6% sales and use tax on items they buy at retail. What many do not appreciate, however, is that whenever they buy goods or services with credit or debit cards, they pay a similar fee to the banks that issue cards and process transactions.  The interchange fees Americans pay are the highest in the world. And unlike taxes, consumers don’t see a return on these fees – their money instead goes six-figure bonuses for executives.

Interchange fees work like this: when a merchant accepts a card payment, the cardholder’s bank – the issuer – withholds a fee, often 2% or more, from the purchase price that it pays to the merchant’s bank (the “acquirer”). The acquiring bank also takes a fee. Once the merchant receives its cash – at the end of the month – it has typically lost more than 2.5% of the price it would have received if the customer had paid cash. The Government Accountability Office has produced this graphical explanation:

Because of these enormous costs, merchants wind up having to increase prices to all customers. Accordingly, cash customers wind up subsidizing the purchases of card customers. And card customers ensure that their local stores cut huge checks every months to the bank networks, namely VISA and MasterCard.

The policy implications are enormous. The National Association of Convenience Stores has testified that card fees are more than double what the industry makes in profits. High gasoline prices are driven, in part, by the $7.6 billion that the industry has to pay to the banks, a cost that is rising in that industry faster than health care costs.

Regulating interchange fees at the state level is not feasible, since most merchants are national banks, and cardholders use their cards throughout the country. But just as Congress has addressed credit card rates for consumers, so too must it address the costs these cartels are imposing on American businesses and American consumers.