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GAO Report Offers Mixed Bag of Commentary on Interchange Fees

The continuing battle over credit card interchange fees is starting to heat up again with the issuance of a report from the U.S. Government Accountability Office that found rising fees have increased costs for merchants.

As part of the 2009 Credit Card Accountability, Responsibility, and Disclosure Act, the GAO was charged with reviewing: 1) how the fees merchants pay have changed over time and the factors affecting the competitiveness of the credit card market, 2) how credit card competition has affected consumers, 3) the benefits and costs to merchants of accepting cards and their ability to negotiate those costs, and 4) the potential impact of various options intended to lower merchant costs.

The GAO cites analysis from the Federal Reserve illustrating that the more consumers use plastic to pay for things, the higher is the cost of accepting credit cards for the merchants. Part of these increased costs, noted the GAO report, also may be the result of how Visa and MasterCard competed to attract and retain issuers to offer cards by increasing the number of interchange fee categories and the level of these rates.

"Concerns remain over whether the level of these rates reflects market power—the ability of some card networks to raise prices without suffering competitive effects—or whether these fees reflect the costs that issuers incur to maintain credit card programs," the report said.

The GAO acknowledged the pros and cons of interchange. For instance, it noted that consumers have benefited from a competitive credit card market with no annual fees, lower interest rates and greater rewards.

By the same token, it also noted that those consumer who do not use cards suffer because they "may be" paying higher prices for good and services, a result of merchants passing along their card acceptance costs to all their customers. This is an argument that has been used by consumer advocate groups calling for greater regulation of interchange rates on credit cards.

Then there are the issuers—particularly community banks and credit unions—who rely greatly on these fees as a source of revenue. The impact upon these financial institutions would no doubt be greater if rates were to be lowered or eliminated.

The Independent Community Bankers Association (ICBA) issued a statement about the report's findings saying interchange is a way of leveling the playing field for banks of all sizes.

"Americans are able to obtain valuable debit and credit card products through their local community bank thanks to an interchange system that provides equity, fairness, and competition for everyone"consumers, merchants, and card issuers. Interchange revenue allows common-sense community banks to compete on equal footing with the largest financial institutions by offering these services, bundled with the long-term relationship-building services unique to the community bank business model."

As for the merchants, size is a factor here as well. All are supposed to receive the benefit of increased sales and reduced labor costs. However, the GAO said representatives from some of the large merchants told the GAO their increased payment costs outstripped any increased sales. These merchants also reported that their inability to refuse popular cards and network rules (which prevent charging more for credit card than for cash payments or rejecting higher-cost cards) limited their ability to negotiate payment costs.

To the ICBA, GAO's findings indicate that fiddling with interchange would benefits only the largest retailers at the expense of consumers and community banks:

"The GAO report clearly shows that interchange legislation places the needs of giant retailers over the needs of consumers and Main Street community bank customers. ICBA urges members of Congress to protect the interests of their constituents, and to oppose harmful interchange legislation that will only lead to less choice and higher costs for America's consumers."

A statement from the Financial Services Roundtable is a bit more measured in its assessment of the GAO report, although it too said interchange ultimately benefits consumers in that the fees allow for seamless transactions at the point of sale for both parties. It concludes the report "does not demonstrate any clear benefit to consumers by providing modifications to the interchange system."

"Credit cards allow merchants of all sizes to generate substantially more revenue, and these fees are a normal cost of doing business," said Steve Bartlett, president and CEO for the Roundtable, in a release. "Consumers benefit by having various payment options."

Of course, the Merchants Payment Coalition, a group representing retailers, was heartened by the GAO findings, saying it confirmed the unfair practices of the card networks. The MPC said in a statement that the report shows card companies and issuers have been "misleading" the public about increasing rates and the benefits of credit cards to businesses. It even stated these unfair practices hurt "Main Street businesses and their customers in order to pad the banks' bottom lines, with little relation to the actual costs of processing payments."

"The report makes it clear that, unless Congress acts to bring competition and transparency into the interchange system, the big banks and credit card companies will keep lining their pockets at the expense of small businesses and consumers nationwide," the MPC statement noted.

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