The Biggest Credit Card Fee Is the One You Don't Know About

By Dawn Handschuh, Personal Finance Writer   

Quick ⎯ do you know what an interchange fee is? If you don't, you should, because that fee increases the cost of everything you purchase, whether you use a credit card or pay cash.

Every time you make a purchase using a credit card, there are actually three other entities involved in your transaction:

• The business accepting your credit card as payment;
• That business's lender, which makes sure the merchant gets paid for the transaction; and
• Your credit card issuer, who reimburses the merchant's lender for the transaction and who in turn bills you for the loan.

Interchange fees are a fixed percentage paid by a business's lender to the credit card company each time a customer makes a purchase using electronic payment (credit or debit). Interchange fees represent part of the expenses that businesses pay to participate in a credit card network and for the convenience of offering their customers an alternative to paying by check or cash.

Businesses ⎯ gas stations, convenience stores, restaurants and other retail outlets ⎯ don't pay interchange fees directly. Rather, they pay their lender a negotiated fee known as the merchant service fee, which may include interchange costs as well as the cost of transaction processing, terminal rental, the lender's profit margin and possibly other fees.

Why should you care? Because merchants pass these fees on to consumers. Interchange fees account for about $2 of every $100 spent using credit cards and inflate the cost of goods, even for consumers who pay cash.

According to the National Retail Foundation (NRF), these fees, which aren't disclosed to customers on their monthly statements or receipts, cost the average family more than $400 a year.¹ That amount has nearly tripled since 2001, and total interchange collections are projected at $48 billion in 2008, said Steve Pfister, NRF's senior vice president for government relations.

Credit card companies counter that the hidden fees help pay for fraudulent use of credit cards, airline points and other rewards programs.

Other retail trade groups, like the National Association of Convenience Stores and National Association of Chain Drug Stores, aren't happy about escalating fees, either. That's why they're backing the Credit Card Fair Fee Act of 2008, or HR 5546, which was approved by the House Judiciary Committee July 16 and now faces a vote by the full House.

HR 5546 would force Visa and MasterCard to negotiate interchange fees with storeowners. In case of an impasse, the Justice Department and the Federal Trade Commission would resolve the issue.

Other card issuers, like American Express, use a different fee structure and don't charge interchange fees. Since Visa- and MasterCard-branded cards represent 80% of the credit card market, merchants who dislike the current fixed rate of about 2% have few choices.

While there's no guarantee that retailers would pass the cost savings onto consumers if the bill becomes law, NRF spokesperson J. Craig Shearman noted, "The retail industry is highly competitive. The Wal-Marts of the world compete primarily on price, and if one doesn't shave a few cents off the price of an item, another one will. Higher-end retailers probably wouldn't lower the price, but they would use the money to put extra sales associates in the store, increase selection, remodel or improve."

Footnote
¹ "NRF Urges Committee to Approve Legislation Requiring Visa/MasterCard to Negotiate Over Hidden Credit Card Fee," National Retail Federation, July 16, 2008