American consumers gained a few basic protections this week regarding their credit and debit cards, but theyâ€™re only the beginning of the reforms needed here. One of the largest issues remains untouched and unmentioned: The big credit and debit card networks, along with the large banks that issue most cards, impose â€œinterchangeâ€ or â€œswipeâ€ fees on merchants of 1.5 percent to 3.25 percent of every credit or debit card purchase. This should matter to everyone, because most of these fees are passed along in higher prices on every purchase, whether or not it involves a credit card. To be sure, merchants and consumers gain economic benefits from the credit card system. But the fees attached to every card purchase are some five-to-six times the actual costs of processing a credit card transaction; and the card networks and card-issuing banks have managed to insulate themselves from any competitive pressures that might bring down those fees.
These findings come from an analysis we just completed for Consumers for Competitive Choice. Our study found that in 2008, merchants paid the credit card networks and the banks issuing the cards some $48 billion in these swipes fees. Of that, less than 20 percent went to cover the actual costs of processing credit and debit card charges and to covering fraudulent charges, with the remaining 80 percent going for a variety of forms of gravy. Only the absence of real market forces enables the card companies and banks to maintain these fees at levels that so far exceed their actual costs.
And all of us bear the costs of these excessive fees. We calculated that merchants pass along about 56 percent of these fees in higher prices. And since the credit card networks bar merchants from charging their customers a lower price if they donâ€™t charge it, the high swipe fees raise the price of everything bought by consumers or businesses â€” from food, clothing and computers to gasoline, restaurant meals, or furnishings. In all, these excess swipe fees cost the average household some $230 per-year. And if the fees were limited to the actual processing costs plus a normal profit, the lower prices for everything would expand real demand enough to create nearly 250,000 more jobs.
All of this comes about because our credit-card system operates along the lines of two interlocking cartels, allowing limited competition among their members while insulating themselves from outside price pressures. Just three card companies â€” Visa, MasterCard and American Express â€” account for more than 95 percent of all consumer charges and two-thirds of all business card transactions. That means that merchants have no choice but to accept most or all of these cards, which in turns means that consumers and businesses that want to charge it have no choice but to do so with these cards.
Furthermore, most of these charges occur on cards issued by just four financial institutions: 70 percent of all charges are placed on cards issued by JP Morgan Chase, Bank of America, Citigroup, and American Express. The four issue a bewildering variety of cards, with various rewards and annual fees attached to different swipe fees for merchants when theyâ€™re used. For example, between Visa and MasterCard, merchants are subject to more than 300 separate swipe rates and fees. But under the rules set down by the card networks and banks, a merchant that accepts one Visa or MasterCard has to accept all of them, regardless of the swipe fees imposed for charges on particular cards.
These arrangements tend to push up the swipe fees. Most of the fees go to the banks. So, Visa, MasterCard and American Express compete for bank business by promising higher swipe fees; while the banks compete for new subscribers by offering increasingly elaborate rewards programs financed by the higher fees. Nor do the cartel-like rules imposed by the card networks and banks allow downward pressures on those fees: Merchants cannot choose which cards to accept based on the fees they pay, which might put pressures on high-fee cards; nor can they charge less for those paying by cash or using low-fee cards, which would allow consumers and businesses to put the pressure on the high-fee cards.
These arrangements are also baldly unfair. More than half of all lower and moderate-income Americans donâ€™t carry credit or debit cards at all, and relatively few of those who do have cards qualify for the rewards programs. Yet, theyâ€™re forced to pay higher prices for everything they purchase, just in order to help finance the card-rewards programs offered to more affluent people.
Itâ€™s long-past time to fundamentally change this part of the system. Australia used to have swipe fees averaging just 0.95 percent. They adopted reforms limiting the fees to the actual processing costs, plus reasonable profit, and they fell to an average of 0.50 percent. Through it all, Australia has retained a healthy credit and debit card system. We should follow Australiaâ€™s example and grant the Federal Reserve or the Federal Trade Commission new authority to set reasonable rules for swipe fees.