Montana Viewpoint
December 24, 2007

Now that Christmas is over and all the gifts unwrapped and being enjoyed, many of us will reluctantly turn our thoughts to having to pay for all that generosity. For most of us that means paying off the credit card bill. That also means paying interest on the balance if we don’t pay it off in one payment; and possibly late payment fees, underpayment fees, balance transfer fees, and, if you complain, a bad attitude fee.

That can add up to a lot of money, and there’s still one fee everyone will pay that very few people have even heard about—the interchange fee. Small wonder hardly anyone knows about it, because it’s a hidden fee. It’s the percentage of a sale that the merchant pays the credit card company on every credit card transaction, and it averages about 1.6% of the purchase price, but can be as high as 2.5%. The total amount of all annual interchange fees, $36 Billion in 2006, is more than the sum of all other credit card fees combined.

I found out about the interchange fee at a conference that I try to attend every year—at my own expense—in Washington, D. C. Each year there are some 20 seminars on various topics and interchange fees was one of my choices. The presenters were an unusual alliance; a consumer advocate organization, US PIRG; a union, Service Employees International Union SEIU; and an industry organization, the National Association of Convenience Stores.

The interchange fee is an equal opportunity kind of charge; everybody who uses plastic pays it, and everybody who pays by cash or check gets to pay it too. That’s because it’s included in the price of the product. Don’t blame the retailer: the credit card rules make it difficult for the retailer to post two prices, one for credit card sales and one for cash. If they do, the credit card price has to be in big letters and the cash price in what could charitably be called “fine print.” Retailers may be able to offer cash customers a rebate from the credit card price, but they can’t make credit card customers pay a surcharge on the cash price.

Visa and Mastercard, the two credit card giants, each write their rules in secret. The rule book for each firm is about the size of a telephone directory—the big city kind. (No, Billings does not qualify as a big city, try Seattle.) Merchants are over a barrel if they don’t like the rules; the only alternative is to not take credit cards, which is an invitation to go broke.

These rules can be changed at any time without prior notice. Here’s my favorite rule of all time: “these rules can be changed at any time for any reason, including no reason.” If that doesn’t take the cut glass flyswatter for pure brazenness, I don’t know what does.

A retailer can also be penalized for letting a customer charge more than the credit card’s transaction limit. You didn’t know about that limit, I bet. Card companies set a limit on certain credit card transactions, most notably at the gas pump. For a long time Visa and Mastercard set it at $50 (it’s higher now). If the store allowed the customer to charge more than that, the retailer was subject to an “overlimit” fee. When the price of gas rose dramatically a couple of years ago a fill up was running well over $50 and purchases were constantly exceeding the limit. Retailers had two choices; set the pump to shut off at $50 and annoy customers by making them do a second transaction to finish filling up; or just let customers exceed the authorized limit so as to not annoy them beyond their already being considerably annoyed by the high cost of gas.

If the customer exceeds that limit, then or now, the credit card company has the right to deny the charge and not pay the retailer (Reason Code 96 in the rules, if you’re keeping score). The customer, however, still has to pay the credit card charge, so the retailer gets zip while the customer gets zapped. I haven’t been able to verify this happens in Montana, but I have found out that the way retailers are credited for purchase is complex enough it could happen without their knowledge.

The convenience store folks and consumer advocate organizations are asking Congress to put the kibosh on the ability of credit card companies to set rules at whim. Essentially, what they are asking is government regulation of what they claim is for all intents and purposes a monopoly engaged in price fixing. It doesn’t benefit the retailers and it sure as shootin’ doesn’t benefit the consumer. If you want to do battle with the credit card companies, my advice is to buy in. Mastercard share price has gone from $39 on May 25, 2006 when they went public, to $210 on December 21, 2007. Visa is going to go public soon. If you can’t beat ’em, join ’em.

Next article: credit card fees and interest rates for card holders.

Jim Elliott
Phone: 406-444-1556
Mail: State Senate Helena, MT 59620