Report: Interchange Fees Obstructs Economic Growth, Job Creation

By Linda Lisanti

INDIANAPOLIS -- Less than 20% of the interchange fees charged by credit card companies actually includes the cost of processing transactions, according to a recent report by former U.S. Under Secretary of Commerce Robert J. Shapiro, entitled: "The Costs of 'Charging It' in America: Assessing the Economic Impact of Interchange Fees for Credit Card and Debit Card Transactions."

The conclusion of the report -- appointed by the Consumers for Competitive Choice (C4CC) coalition and co-authored by economist Jiwon Vellucci -- were released yesterday during a teleconference -- onthe same day the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 went into effect.

Under the act, the credit card industry is required transparency with consumers in calculating fees and interest rates However, some groups like C4CC have criticized the legislation for their failure addressing the critical issue of interchange fees.

Banks and credit card companies appropriated $48 billion in interchange fees from Americans in 2008 alone -- up 300% in less than a decade. According to the Indianapolis-based consumer coalition, every dollar spent on the fees is a dollar not being spent on hiring employees or passing savings on to consumers.

In yesterday's teleconference, Shapiro said the report was directed at disclosing why interchange fees, also known as swipe fees, are so high in the United States compared to other countries, and what the consequences are of having such high fees in the economy.

As to why the fees are so high, Shapiro said the U.S. credit card industry doesn't have free market competition since 80% of all consumer transactions happened on 3 cards -- Visa, Mastercard and American Express -- and 4 banks, including giants Bank of America and Citigroup, is in lead of the issuance side of credit cards.

"There is a lot of competition within this handful of companies," he said, observing the credit card companies and banks compete with each other through large rewards they offer that are financed by the fees. "The competition is driving these fees higher rather than driving them lower."

Interchange fees average between 1% and 3% of the value of every purchase. This is not the same with the fees charged in other countries, according to Shapiro.

More than half of these charges are passed on to consumers through higher prices, he added. The report discovered that the average American household, even without using the cards themselves, pays $230 every year in higher retail prices caused by credit card fees not related with the cost of processing transactions. "That lessens the real demand for goods and services because $230 a year is going to these fees," said Shapiro.

Also according to the report, if interchange fees were cut to the actual cost of processing the transactions and add an average profit level, the resulting rise in economic activity would produce nearly 242,000 new jobs across the U.S. economy.


"Although the CARD act [contains] significant changes and reforms, this should be just the beginning. The next stage should be amending the swipe fees," he concluded.


VIA CSNEWS

Keyword: Credit card

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