LAST YEAR'S holiday season generated a staggering $21 billion in revenues, according to the Consumer Electronics Association. American households on average spent hundreds of dollars on gifts galore. But many Americans were likely unaware of the billions of dollars secretly being funneled into the hands of credit card corporations.
On every purchase made using Visa and MasterCard credit cards, a fee up to 2 percent, called an interchange, is charged unbeknownst to the purchaser.
Luckily, a consortium of businesses known as the Merchants Payments Coalition (MPC) and similar organizations representing a multitude of businesses across the nation have launched an assault on the credit card industry.
MPC estimates reveal that in 2005, interchange raked in $30.7 billion from consumer pockets. Yet, the fee still not disclosed to the consumer on receipts or even in their monthly statements because it's already built into the price of goods. But the built-in cost can't be revealed by virtue of a non-negotiable contract with credit card companies. Businesses are unfortunately left with the option of agreeing to this insidious deal with small businesses taking the greatest blow.
The average convenience store paid about $39,730 in credit card fees in 2005 as revealed by a hearing of the U.S. Senate Judiciary Committee in 2006. What's most incredulous about this fact is that credit card companies are extracting a salary's worth of money from convenience stores -- which presumably don't even generate large revenues.
Even more bothersome is that Visa calls interchange a "fair mechanism for fueling growth and sharing system cost." But if that were true, then there wouldn't be 13 trade associations in America currently up in arms against Visa and MasterCard. Interchange rates are especially not "fueling growth." Visa probably confused increasing average interest rates annually with the expansion of the credit card market. A 2003 Federal Reserve study found that for the first time in history, Americans were making more transactions using credit cards as opposed to checks. Plus, it's not really "fair" when two credit card companies are strangling the entire credit card market.
MPC market studies indicate that Visa and MasterCard control 80 percent of the credit card arena. So consumers and businesses want to use credit cards, they have no choice but to accept the terms of their corporate bullies. How exactly does Visa and MasterCard manage to dominate the credit card market?
Ask an economist if you really want to know, but fingers have been pointed at price-fixing. With interchange fees fixed in the dark by Visa and MasterCard, competition from smaller credit card companies is effectively hampered. Because the public is unaware of the phantom interest rates, credit card companies can continue to increase their interchange fees without fear that they might lose cardholders to other companies. Moreover, Visa and MasterCard attract issuing banks by increasing their interchange rates. A higher interchange translates into more money the bank collects from the consumer. This type of price-fixing is non-conducive to competition. And given that the profits made in the credit card industry -- at least by Visa and MasterCard -- are substantially comprised of unfair interchange collections, it's easy to think that the government has put a stop to interchange practices.
But according to the Federal Reserve, of several countries, the United States and Canada are the only ones with interchange rates increasing unchecked. Interchange regulation has unfortunately emerged only at the state level with New York and Kentucky leading the way. In 2006, both states passed legislation barring Visa and MasterCard from subjecting sales taxes to interchange fees. Congress must follow the lead of state legislatures by promoting laws which will provide greater transparency in interchange procedures, if they are to exist at all.
The fact of the matter is that most Americans are not only being duped into paying more money, but they're also unintentionally bolstering dubious corporate practices. And college students with their tight budgets bear the brunt of paying more money to corporate blood-suckers.
Charles Lee's column usually appears Fridays in The Cavalier Daily. He can be reached at clee@cavalierdaily.com.
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