GAO Said Proposed Swipe Fee Cut May Hurt Consumers

A recent proposal by lawmakers to reduce fees being charged by card issuers to merchants could actually be counterproductive and could lead to higher costs for consumers. The Government Accountability Office agrees that merchants would stand to benefit from this proposed measure and may even pass off savings to consumers. On the other hand, banks whose bottom-line will be affected by lower interchange revenues may compensate the dip in profits by increasing fees charged to cardholders.

So on a short term outlook, consumers may gain savings through lower merchandise costs, but eventually higher credit card fees may obliterate any perceived gains. The recent report conducted by the Government Accountability Office may be used by lawmakers as a guide in deciding on whether to pass legislation against increasing merchant fees. Wal-Mart Stores Inc. and Target Corporation are among the retailers who are lobbying in Congress to have merchant fees reduced. However, big time lenders like Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. are worried that if reforms were to take place, profits from the highly lucrative area of merchant fees will be significantly hit.

Some analysts believe that reforms in interchange fees are unlikely to materialize in the near future due to lack of conclusive research studies that support the argument that reducing merchant charges will improve the lot of consumers and other concerned entities.

Banks use merchant charges they collect from stores to pay for rewards points and to cover costs of payment defaults. It is also a highly lucrative revenue stream, with credit issuers reporting gross receipts of $48 billion in 2008. For top credit card companies like Visa and MasterCard, it represents a significant portion of their overall revenue, accounting for almost 20% of their net profit.

Electronic Payments Coalition, a group opposed to the proposed legislation believes that the measure would affect consumers more than card issuers who can very well adapt to reforms by jacking up card charges.

Some lawmakers believe otherwise. Vermont Congressman Peter Welch quoting studies said that merchant fees in the US are the highest in the world, which currently averages 2% per transaction. Welch is authoring a bill that will stop credit card companies from increasing any further interchange fees for premium cards.

He said that his bill will benefit small mom and pop stores, businesses that are most impacted by the high transaction fees charged by credit issuers.

The National Retail Federation is asking Congress to quickly act on the proposed merchant fee reform bill, which they believe would bring timely relief to ailing merchants and consumers.

Bryant Park

Bryant Park is a financial consultant for one of the companies listed on Wall Street. He writes on a variety of topics ranging from credit cards to different loans that can be availed by consumers. He holds a bachelor degree in Financial Services from Dartmouth College.