Interchange is the biggest credit card fee you have never heard of
Hidden credit card interchange fees inflate the cost of nearly everything consumers buy, even when you pay cash. Two dollars of every $100 the consumer spends using credit cards goes directly to the credit card industry. Americans paid over $48 billion in interchange fees in 2008, more than twice what was paid in credit card late fees and three times ATM fees.
...and most of the fee pays for all that credit card junk mail!
What started in the 1960s as a fee to cover the transaction costs of using plastic is now a cash-cow for the big banks that issue 90% plus of all MasterCard and Visa cards. According to a consultant for the big banks, only 13% of the credit card interchange fee goes to processing credit card transactions; much of the rest goes to pay for billions of pieces of unsolicited junk mail annually among other dubious credit card marketing activities aimed at students or those with bad credit histories.
It’s the sub-prime mortgage crisis all over again!
The same reckless, predatory lending practices that led to the sub-prime mortgage meltdown still prevail with credit cards. Fat interchange fees have created a perverse incentive for the big banks to abandon responsible underwriting practices in favor of a fee-driven business model in which virtually anyone can get a credit card. Inflated fees charged on lending means that banks care more about maximizing fee income than making sure borrowers can afford to repay their loans. Interchange is one of the root causes of the billions of dollars in toxic credit card debts on the books of the big banks. And just like the sub-prime mortgage mess, rising credit card default rates start with consumers who never should have been granted credit in the first place.
You can’t teach an old dog new tricks…
This business model hurts everyone. Nevertheless, the big banks still push credit cards today the same way they used to push sub-prime mortgages. And the same big bank lobbyists who defended sub-prime mortgage fees and practices pre-TARP are still defending and promoting the same credit card interchange fees and practices today!
These secret credit card fees hurt consumers and merchants
US interchange rates are among the highest worldwide precisely because the fees are set in secret and hidden from view. Raising interchange fees is how Visa and MasterCard encourage banks to issue more credit and debit cards - as long as rising rates are kept top secret, consumers have no way of knowing the extra costs they are paying. Visa, MasterCard, and the big bank credit card issuers win; only merchants and consumers who are kept in the dark lose.
Visa and MasterCard operate like price-fixing cartels and violate federal antitrust laws. Visa issuers collectively set credit card interchange fees in secret and MasterCard issuers separately do the same. The fees can't be negotiated and are not adequately disclosed to merchants or consumers. That's why unfair credit card interchange fees continue to rise rapidly despite improved processing technology, consistently low interest rates, and rapidly rising card volume.