Consumer Law

Paying with a Credit Card Where Does the Money Go

 
  • Update. The US Senate passed an amendment to proposed law to limit "swipe fees" charged by credit card companies
  • Credit card companies charge merchants a fee each time you buy something using a credit card
  • These fees, called interchange fees, are usually about 2 percent of the transaction cost
  • Sellers do not like these fees because they lose profits

 

Update

In May 2010, an amendment to the proposed Wall Street Reform and Consumer Protection Act of 2009 was passed by the US Senate. The amendment proposed by Senator Dick Durbin helps limit the amount of "swipe fees" charged by big credit companies, like Visa and MasterCard, when customers use credit and debit cards.

The swipe fees charged to retailers can be passed on to customers by raising prices. Under the amendment, stores can give discounts to consumers paying with cash or credit and debit cards with lower swipe fees. Also, the Federal Reserve is required to come up with new rules to make sure swipe fees are fair and reasonable.

Original Article

When you use your credit card, you usually don't have to pay an extra fee. However, unknown to you, the business actually ends up paying for each electronic credit card transaction you make.

This interchange fee is the fee the bank issuing your credit card charges to the business' bank in the sale. That means that out of your sale, the seller usually loses about 2 percent.

How Does It Work?

As an example, let's say you go to a store and want to buy clothes. The bill comes to $100, and you pay using a credit card. For that $100 item, the retailer would end up getting approximately $98. The remaining $2, known as the merchant discount gets split up. About $1.75 goes to the card issuing bank, $0.18 goes to Visa or MasterCard association, and the remaining $0.07 goes to the business' merchant account provider.

These fees are set and created by the credit card associations and have a complicated pricing structure based on:

  • The card brand
  • Whether it's a credit or debit card
  • The type and size of the accepting merchant
  • The type of transaction (e.g. online, in-store, phone order)

Why Are There Interchange Fees?

Credit card companies explain they use interchange fees to cover the expense of fraudulent purchases made with lost or stolen cards. Credit unions say without those fees they'd be forced to think about if they could afford to offer debit and credit cards to consumers at all.

Also, banks don't expect to make a large profit from late fees and interest charges from those customers who pay in full every month. So they instead make their profits on the fee charged to merchants.

However, credit card companies such as Visa and MasterCard have such a large share of the market, and can set up unfair charges to businesses. Retailers don't have much choice other than to choose not to accept credit card purchases, which typically results in lost business. Some may choose only to accept Visa and MasterCard rather than including American Express, which charges higher fees.

Difficulties

In recent years, interchange fees have become a controversial issue and the subject of regulatory and antitrust investigations and ongoing lawsuits.

These fees are big problems for many sellers. Businesses can try to shop around for different partners to handle electronic payments. However, unless they are retail giants like Wal-Mart, they have very little negotiation power.

As a result, a number of sellers banded together to fight what they describe as unfair pricing. Convenience store chain 7-Eleven created a petition campaign against unfair fees and collected 1.6 million signatures.

Government Reform?

As the interchange fee profits continue to grow with the credit card market, the number of banks issuing cards shrinks. Sellers view these fees as unfair and are pushing for needed government reform. Merchant groups such as Merchants Payments Coalition and Merchant Bill of Rights argue that interchange fees are much higher than necessary.

The explanation is that even though technology and efficiency has improved, interchange fees have more than doubled in the last 10 years. The credit card issuers reply that lowering interchange fees would result in increased costs for cardholders, and reduce their ability to satisfy rewards on cards they've issued. Nonetheless, merchant lawsuits accuse these banks of collusion and price-fixing, and accuse them of violating US antitrust laws.

The government has heard this criticism and is trying to address these concerns. First, Senate hearings have discussed the fact that interchange fee schedules are secretive and have required both Visa and MasterCard to release more information on their card rules.

The House Judiciary Committee antitrust division then began hearings to study this issue. The Credit Card Fair Fee Act was introduced in 2008 that seeks to create a panel of judges to oversee interchange fees appointed by the Department of Justice Antitrust Division and Federal Trade Commission.

The Future

While there has been recent credit card reform in the Credit CARD Act of 2009, interchange fees were not addressed. While the CARD Act caps credit card fees and makes it more difficult to raise interest rates and fees, credit card companies now need to find new ways to create a profit.

Raising the interchange fee is one way, meaning merchants will raise their prices and ultimately will impact you, as the buyer.

Questions for Your Attorney

  • Can I refuse to allow my card company to charge interchange fees?
  • Is there a petition I can sign to have card companies stop charging these fees?
  • If I'm a small business owner, how are credit card fees treated for tax purposes?

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