Durbin: Interchange Fee Stunts Small Business Growth, Leads to Higher Prices for Consumers

[CHICAGO, IL] – Small businesses are being squeezed and consumers are paying higher prices as a result of rising interchange fees assessed by credit card companies each time a credit or debit card is used, U.S. Senator Dick Durbin (D-IL) said today as he announced legislation he plans to offer to fix the problem.

“Higher interchange fees for businesses mean higher costs for retailers and consumers,” said Durbin. “Every time you make a purchase with plastic, the bank that issued your credit card gets a cut of the sale amount.  American businesses and consumers are getting nickled and dimed by the big banks, who end up making billions from these hidden fees.  Interchange fees need to be fairly and transparently negotiated between the merchants and the credit card companies who represent the banks’ interests so working Americans don’t get shortchanged.”

Visa and MasterCard require an interchange fee of one to three percent of the transaction amount to be paid every time someone uses a debit or credit card.  Visa and MasterCard then pass the money along to the banks that issue their cards, giving the banks an incentive to issue additional cards.  Approximately $50 billion in interchange fees was collected in 2008, with about 80 percent of that money going to just ten big banks.

Banks love that money and they love the current interchange system,” Durbin said.

Interchange fees are deducted from the transaction amount, meaning that when a business makes a $100 sale by credit or debit card, the banks and the card networks take a cut out of the sale amount and the business ends up with $98 or less.  To make up for the interchange fees, businesses often either raise their prices or cut back on other expenses, like hiring.

In a normal market, banks would compete with one another to win merchant business by lowering interchange fees to cover only the processing costs.  But the credit and debit card markets are not normal markets.  Visa and MasterCard unilaterally set interchange fee rates that apply to all banks within their card networks.  There is no negotiation between banks and merchants over reducing interchange rates.  In fact, Visa raised many of its debit fees by 30 percent just last month.

“The setting of non-negotiable rates by companies with overwhelming market power not only represents a failure of the market, it pinches the pocketbook of every American,” Durbin said.  “Congress needs to pass meaningful and comprehensive reform of interchange fees.  American consumers and businesses deserve a fair shake from the credit card companies.”

Durbin’s amendments, to be offered to the Wall Street reform bill, would direct the Federal Reserve to ensure that debit card interchange fees be “reasonable and proportional” to the costs incurred in processing the transaction.  The legislation would also strip anti-competitive provisions from Visa and MasterCard’s contracts and let merchants offer discounts for using one card or the other if they choose to do so. 

“These interchange fees have real life consequences on Main Street.  Small businesses and merchants deserve a credit and debit card system that works for them and their customers, not just the big banks and credit card companies.”