The Great Interchange Fee Scam

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Adam Ozimek is obviously trying to make my head explode this morning. Today he points to a new paper from the Boston Fed that investigates the consequences of credit card interchange fees. The basic background is this: (1) card companies charge merchants a 1-2% interchange fee on all credit card purchases, (2) merchants raise the prices of all their products slightly in order to cover this cost, and (3) because most merchants charge everyone the same price, regardless of whether they use cash or credit, cash users end up paying a little more than they should while card users pay a bit less than the actual cost of the interchange fee they incur. So what does it all mean?

On average, each cash-using household pays $151 to card-using households and each card-using household receives $1,482 from cash users every year. Because credit card spending and rewards are positively correlated with household income, the payment instrument transfer also induces a regressive transfer from low-income to high-income households in general. On average, and after accounting for rewards paid to households by banks, the lowest-income household ($20,000 or less annually) pays $23 and the highest-income household ($150,000 or more annually) receives $756 every year.

Isn’t that peachy? This is the result of allowing an effective monopoly in the card business, thus giving network providers the power to force merchants to keep interchange fees hidden instead of charging them directly to card users. Vast masses of poor and middle income families end up paying a few dollars into the system every year while a small number of upper income families reap the benefits.

This is why I don’t like hidden fees: there’s rarely much point in keeping something hidden if it’s fair and equitable. You only do that if someone is getting screwed. And guess who gets the shaft more often than not?

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DEMOCRACY DOES NOT EXIST...

without free and fair elections, a vigorous free press, and engaged citizens to reclaim power from those who abuse it.

In this election year unlike any other—against a backdrop of a pandemic, an economic crisis, racial reckoning, and so much daily crazy—Mother Jones' journalism is driven by one simple question: Will America will move closer to, or further from, justice and equity in the years to come?

If you're able to, please join us in this mission with a donation today. Our reporting right now is focused on voting rights and election security, corruption, disinformation, racial and gender equity, and the climate crisis. We can’t do it without the support of readers like you, and we need to give it everything we've got between now and November. Thank you.

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