As technology has vastly improved the efficiency and speed of many services, we’ve come to expect cost-savings as a by-product. If something requires less time and manpower, it makes sense that it should cost the provider less to provide and, in turn, the purchaser less to purchase.
Almost 20 years ago, when digital scanning came into mass use, my company charged $5 to scan a photo. The machines were new and expensive, the paper and other tools also costly. Today, the infrastructure is more affordable and the process faster – so we can do more scanning, in less time, at a lower cost. We charge less than 5 cents to scan a photo – 1 percent of the price in 1990.
Back then, when you charged something to your credit card, the retailer paid about 2 percent of the transaction total to the credit card company. That “interchange fee” covered the cost of processing the transaction records we merchants created by running your credit card through the imprinter (remember your messy carbon copies?). Someone at Visa or MasterCard had to go through all those paper slips and make sure the merchant was paid and the customer was billed. For many the price seemed fair enough, given the convenience.
Today, we slip your card through a device that records your account number electronically and, at the speed of light, sends the credit card company an electronic notice of the purchase. Computers figure it all up, put money in our account (also electronically) and bill you. (If you’re like many people, you pay that bill on-line, another advantage of technology.)
That streamlining of the process must mean that the interchange fee, like the price of our photo scans, also is a tiny fraction of what it was in 1990, right? Wrong! It’s still about 2 percent of the total transaction. Merchants – and in turn customers – still pay the cost of manual processing in a digital world.
Higher processing fees when processing costs are headed the other way isn’t how free markets are supposed to work. But that’s the way this system works because Visa and MasterCard – which control 80 percent of the credit card market – don’t have to negotiate the fees with merchants. Whatever Big Credit says goes.
Card users haven’t complained much because most never heard of the interchange fee. It’s not itemized on your monthly statement – but it is embedded in everything you buy. And we retailers see it every month in our bank records, when Visa or MasterCard keeps that 2 percent.
Today, one study shows, transaction processing consumes only about one-eighth of the interchange fee. The credit card companies rightly use some of the rest for high-tech security measures that protect card holders from identity theft and the card issuers themselves from customers who don’t pay. But those costs also are relatively small.
Much of the current interchange fee goes for things customers and merchants probably don’t find essential. Visa and MasterCard spend lavishly on advertising and junk mail, enticing us to use plastic even more often (and, in turn, hand over more interchange fees!).
To cover the interchange fee, the average American family pays more than $400 annually in additional costs for goods and services.
Regulators in Europe and Australia long ago saw the unfairness of this and demanded that credit card issuers roll back interchange fees. Today, Congress has a chance to slash the hidden tax on credit cards.
The Credit Card Fair Fee Act is supported by a number of both Republicans and Democrats on Capitol Hill. It would end the current practice under Visa and MasterCard, and the banks issuing their cards, dictate the interchange fee to retailers. From now on, retailers would negotiate fees with the credit card industry (primarily via retailer associations and trade groups).
The Credit Card Fair Fee Act won’t be enacted, however, unless the millions of Americans who use those cards demand an end to this hidden tax. The credit card lobby in Washington is strong. The millions who pay the tax must speak up and demand an end to the outrageously high tax on credit card purchases.
Commentary by Mitch Goldstone, president and CEO ScanMyPhotos.com and editor of WayTooHigh.com – The Credit Card Interchange Report