The GAO released this report last Thursday, on credit card interchange rates. Interchange rates are the rates charged by the banks that issue credit cards, and typically are about 2% of each transaction. These rates are extremely frustrating to merchants because they have been steadily increasing and because merchants (especially small businesses) have no practical means for negotiating these rates. Basically, if you want to accept Visa and Mastercard you are stuck with interchange rates. But hue and cry from merchants has caught the attention of the Feds. There are several legislative proposals on the table designed to help control interchange rates, and Congress directed the GAO to create a report on the subject.

The GAO report verifies the perception of merchants that interchange rates have gone up. The report also suggests that issuing banks may exercise market power, such that they can raise rates without losing customers (an economically inefficient state of affairs). That aspect of the report is the good news for merchants and their political advocates. The bad news is that the report criticizes the most commonly proposed approaches for fixing the problem, including (i) setting interchange rates, (ii) requiring disclosure of rates to consumers, (iii) prohibiting card networks from imposing rules on merchants, and (iv) antitrust exemptions to allow merchants to directly negotiate with issuing banks (which would generally be considered an illegal agreement in restraint of trade). The GAO is apparently skeptical that such measures would actually reduce prices for consumers.

While the best solution to interchange rate hikes may need to come from government, there are other transaction costs that merchants can negotiate down, including processing fees (for an earlier blog post explaining the difference between interchange and processing fees, click here). In fact, the GAO report found that the market for processing fees is in fact highly competitive. Each year approximately 1.4 million merchants switch processors (otherwise known as merchant account providers). FeeFighters tries to make it easier for merchants to make this switch, by setting up an internet auction to find the best-priced processor.