Washington Retail Insight

Federal Reserve Report Says Credit Card Swipe Fees Force Poor to Subsidize Wealthy

By J. Craig Shearman
Washington Retail Insight
July 28, 2010

A new Federal Reserve study released this week shows that credit card swipe fees result in low-income individuals subsidizing the card use of wealthy individuals and outlines policy options Congress could consider to bring the fees under control.

“The typical consumer is largely unaware of the full ramifications of paying for goods and services by credit card,” the Federal Reserve Bank of Boston wrote in a 56-page public policy discussion paper released on Monday. “What most consumers do not know is that their decision to pay by credit card involves merchant fees, retail price increases, a nontrivial transfer of income from cash to card payers, and consequently a transfer from low-income to high-income consumers.”

Since credit card industry practices bar retailers from imposing a surcharge for credit card use, merchants are forced to include swipe fees in the prices charged to all customers, the study said. That results in “credit card-paying customers being subsidized by consumers who do not pay with credit cards.” Since wealthier consumers are more likely to hold credit cards, the fees further result in a “regressive transfer of income” from lower-income to higher-income consumers.

While swipe fees drive up prices for all consumers, an estimated $151 of the extra amount paid by the average cash-using household goes to subsidize card-using households, the report said.

NRF said the report was evidence of the need for further federal action to control the fees.

“This report confirms what we’ve always known – that swipe fees drive up costs for all consumers and that struggling moderate and low-income consumers who often are unable to take advantage of card perks or who don’t have a credit card at all end up subsidizing the wealthier individuals who do,” NRF Senior Vice President and General Counsel Mallory Duncan said.

“This also shows the importance of the new law allowing retailers to give a discount to customers who don’t use credit cards,” Duncan said. “But the report recognizes that the real solution won’t come until there is genuine consumer transparency and competition that lowers credit cards fees to a point that reflects banks’ actual costs for processing these transactions.”   

The report said the subsidy is an issue lawmakers “may wish to address” and outlined a number of policy options that could be considered, including allowing merchants to charge different prices for cash and credit, disclosure of “full information” about fees, redistribution of fees to low-income individuals through tax policy, increased competition from alternative payment systems if it cannot be attained within the credit card market, and government regulation of both credit card fees and rewards.

The report was issued less than a week after President Obama signed financial services reform legislation that included provisions to address credit and debit card fees. Federal law has long allowed retailers to give a discount for cash or checks, but card industry rules and practices have made discounts difficult in actual practice. The new law goes further by barring the card industry from interfering with merchants who offer a discount or other benefit to customers who pay by cash, check or debit card rather than credit cards. The measure also gives the Federal Reserve nine months to set regulations resulting in “reasonable and proportional” swipe fees for debit cards, and allows merchants to set minimum purchase amounts of up to $10 for credit cards.
 
Swipe fees – officially known as interchange fees – are a percentage of the transaction charged by card company banks each time a card is swiped to pay for a purchase. The fees average between 1 and 2 percent for debit cards and 2 percent or more for credit cards. Overall swipe fees charged to retailers and other business by Visa and MasterCard banks totaled $48 billion in 2008, with debit swipe fees accounting for about $20 billion of the total. As more consumers use plastic, prices are driven higher, Duncan said.

© 2010 National Retail Federation