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May 6, 2009


Stacy Mitchell, New Rules - As Congress and the Obama administration consider legislation to rein in abusive practices by credit card issuers, the focus so far has been on the interest and other fees that consumers pay directly. Little attention has been given to the $48 billion in fees that credit card companies extracted from merchants last year. Largely invisible to the public, these fees, which amount to $427 per household, are ultimately passed on as higher prices to all consumers, whether they use plastic or not.

These fees, known as interchange, are set by the credit card processors: Visa, MasterCard, and American Express, which together control 93% of all card transactions in the United States.

Businesses that want to accept credit cards have no other choice but to pay these fees. Unlike many other countries, the U.S. does not regulate interchange fees and federal law prevents retailers from banding together and bargaining collectively. Only Wal-Mart has had enough market clout to negotiate with MasterCard and Visa, and then only with the aid of a lawsuit. Independent businesses are largely at the card companies' mercy.

Not surprisingly, interchange fees have soared. Although the exact rate charged on any given transaction varies widely depending on many factors, including the size of the business and the type of card, the average interchange fee in the U.S. is now about 2% of the value of the sale - two to six times the regulated rates imposed on Visa and MasterCard in Australia and much of Europe. . .

Issuing credit cards has become a highly concentrated industry. The top four card issuers - Citigroup, Bank of America, JP Morgan Chase, and Capital One - account for more than 70% of all cards in circulation. . .

For independent businesses, credit card fees can rival or even exceed their profits. Kathy Miller, fifth-generation owner of a general store in Elmore, Vermont, testified before the Senate Judiciary Committee that, on a $10 gasoline sale, she makes 49 cents in profit and pays 47 cents in credit card fees.

Many countries have brought antitrust suits against the card processors or otherwise used their regulatory authority to limit interchange fees. The list includes Australia, Brazil, Colombia, Germany, Honduras, Hungary, Israel, Mexico, New Zealand, Norway, Poland, Portugal, Romania, Singapore, South Africa, Spain, Sweden, Switzerland and the United Kingdom.

In April, the European Union reached a settlement with MasterCard in a case alleging that its cross-border interchange fees were anticompetitive. That settlement brought the weighted average for credit card interchange fees down to 0.3%. (Earlier action against Visa similarly lowered its rates.)


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June 5, 2009 11:13 PM  

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