3 Myths about Interchange Rates

The US Capitol grounds were jam-packed with demonstrators on September 30, to protest against high interchange fees. These people were franchisees of 7-Eleven who called themselves victims of surging fees that merchants pay to banks every time consumers use their credit cards. The crowd called for a limit on these fees.

Navdeep Bassi, an owner of four 7-Eleven stores, pays $28,000 in a year, which is 30% of what he takes home. In 2008 alone, interchange rates generated $48 billion for banks. Bassi wants Washington to take action.

Two bills addressing this issue were passed to Congress. They were sponsored by members of congress who spoke at the rally. They take two ways to limit the negative impact of fees -- one, to allow store owners to bargain with credit card providers for lower fees, and two, to allow them to offer discounts to those who want to pay in cash.

The following are myths that small business owners and consumers should keep in mind before demanding a Washington act:

1. Interchange rates will squeeze more money out of business owners. Zoe Lofgren, a democratic representative from California, revealed that the reason why these fees are high is that banks are boosting profits. A website set up by the Merchants Payments Coalition asserts that a huge chunk of these charges will pay for unsolicited junk mails aimed at students or consumers with bad credit histories. LowCards.com CEO, Bill Hardekopf, argues that there is no correlation between interchange charges and mails that customers receive. These charges are set by MasterCard, Visa, and other companies.

2. We know where profits go if charges were regulated. Proponents of the regulation assert that these rates would lead to high prices which cost customers a bundle. 7-Eleven franchisees hope to get 1.66 million signatures from consumers on a petition to put an end to unfair card charges. Electronic payments coalition argued, however, that lesser fees would mean more money for business establishments, not the consumers.

3. Limiting fees is the solution. There are other proposals that could alleviate the burden without reducing fees. The National Small Business Association (NSBA) says that this issue could be addressed if payment agreements between card companies and business owners could become more transparent.

Congressman Peter Welch of Vermont has recently proposed a bill to force credit card companies to disclose rates and terms and allow merchants greater flexibility in pricing.

It is not only Washington that could reduce the burden of interchange rates. States could help too. High state and local taxes multiply the problem because the interchange fee is equal to the transaction price plus sales tax.

Doug Nicholas

Doug Nicholas, a financial consultant by profession with a Masters degree in International Business from Brown University, is also an ardent writer. Though he has a full time job at one of the companies listed on Wall Street, he does manage to squeeze in time to follow his passion. He puts his ideas to words in his articles related to finance and business.