The swiped  transaction provides more information to the issuer authorizing the sale,  and issuers and card networks consider such transactions to be less risky  because the card was present. Fees Merchants Pay for Accepting Credit Cards Have Increased over Time and May Be Related to Competition for Issuers in the Credit Card Market

The amounts merchants pay to accept credit cards is increasing, as  Federal Reserve data indicate that consumers increasingly use credit cards  to make payments, but also because network competition in the credit  card market may be contributing to rising interchange fees. However, concerns remain over whether the level of interchange fee  rates reflect the ability of some card networks to exercise market power  by raising prices without suffering competitive effects, or whether these  fees are the result of the costs that issuers incur to maintain their credit  card programs. Issuers, particularly smaller issuers such as community  banks and credit unions, report relying on interchange fees as a significant  source of revenue for their credit card operations, and analyses by  banking regulators indicate that card activities traditionally have been  among the most profitable types of activities for large banks. However, consumers who do not use credit cards may  be made worse off by paying higher prices for goods and services, as  merchants pass on their increasing card acceptance costs to their  customers. However, representatives of the large merchants  with whom we spoke with said that their increased payment costs had not  led to a corresponding increase in sales, particularly for cards with higher  interchange fees such as rewards cards. In addition, these merchants  reported that their ability to negotiate lower payment costs was limited by  their inability to refuse popular network cards as well as network rules for  card acceptance, which, among other things, preclude merchants from  adding surcharges for credit card payments or rejecting higher-cost cards. Finally, although interchange fees are not regulated at the federal level in  the United States, concerns regarding card costs have prompted DOJ  investigations and private lawsuits, and authorities in more than 30  countries have taken or are considering taking actions to address such  fees and other card network practices. Merchants Reported Benefits from Credit Card Acceptance Include Increased Sales, Faster Payments, and Lower Labor Costs

Merchants can receive a variety of benefits—primarily, increased sales— from accepting credit card payments. Preferred treatment: Merchants may not direct consumers away from or to  a certain network’s cards. These options generally have  involved one or more of the following approaches: (1) setting or limiting  interchange fees; (2) requiring their disclosure to consumers; (3)  prohibiting card networks from imposing rules on merchants, such as  those that limit merchants’ ability to discriminate among different types of  cards or levy a surcharge for credit cards; and (4) granting antitrust  waivers to allow merchants and issuers to voluntarily negotiate rates. Both RBA and the  European Commission have used this approach, and regulators in other  countries have worked with Visa and MasterCard to voluntarily reduce  their interchange rates. If interchange fees for merchants were lowered, consumers could benefit  from lower prices for goods and services, but proving such an effect is  difficult, and consumers may face higher costs for using their cards. Agency Comments and Our Evaluation

We provided a draft of this report to the Department of Justice, the Board  of Governors of the Federal Reserve, the Federal Trade Commission, the  Federal Deposit Insurance Corporation, the National Credit Union  Administration, the Office of the Comptroller of the Currency, and the  Office of Thrift Supervision for their review and comments. Appendix I: Objectives, Scope, and Methodology

Our objectives were to describe (1) how the fees merchants pay for  accepting credit cards have changed over time and the factors affecting  the competitiveness of the credit card market, (2) how credit card  competition has affected consumers, (3) the benefits and costs to  merchants of accepting cards and their ability to negotiate those costs, and  (4) the potential impact of various options intended to lower merchant  card fee costs.
Why GAO Did This Study

When a consumer uses a credit card to make a purchase, the merchant does not receive the full purchase amount because a certain portion of the sale is deducted to compensate the merchant's bank, the bank that issued the card, and the card network that processes the transaction. The level and growth of these rates have become increasingly controversial. The 2009 Credit Card Accountability, Responsibility, and Disclosure Act directed GAO to review (1) how the fees merchants pay have changed over time and the factors affecting the competitiveness of the credit card market, (2) how credit card competition has affected consumers, (3) the benefits and costs to merchants of accepting cards and their ability to negotiate those costs, and (4) the potential impact of various options intended to lower merchant costs. To address these objectives, GAO reviewed and analyzed relevant studies, literature, and data on the card payment market and interviewed industry participants, including large and small card issuers (including community banks and credit unions), card processors, card networks, large merchants representing a significant proportion of retail sales, and small merchants from a variety of industries, and academic experts. GAO provided a draft of this report to the Department of Justice, the Federal Trade Commission, and federal banking regulators, and we incorporated their technical comments where appropriate.

What GAO Found

According to Federal Reserve analysis, total costs of accepting credit cards for merchants have risen over time as consumers use cards more. Part of these increased costs also may be the result of how Visa and MasterCard competed to attract and retain issuers to offer cards by increasing the number of interchange fee categories and the level of these rates. Concerns remain over whether the level of these rates reflects market power--the ability of some card networks to raise prices without suffering competitive effects--or whether these fees reflect the costs that issuers incur to maintain credit card programs. Issuers, particularly smaller issuers such as community banks and credit unions, report relying on interchange fees as a significant source of revenue for their credit card operations, and analyses by banking regulators indicate such operations traditionally have been among the most profitable types of activities for large banks. Some consumers have benefited from competition in the credit card market, as cards often have no annual fees, lower interest rates than they did years ago, and greater rewards. However, consumers who do not use credit cards may be paying higher prices for goods and services, as merchants pass on their increasing card acceptance costs to all of their customers. For merchants, the benefits of accepting credit cards include increased sales and reduced labor costs. However, representatives from some of the large merchants with whom we spoke said their increased payment costs outstripped any increased sales. These merchants also reported that their inability to refuse popular cards and network rules (which prevent charging more for credit card than for cash payments or rejecting higher-cost cards) limited their ability to negotiate payment costs. Interchange fees are not federally regulated in the United States, but concerns about card costs have prompted federal investigations and private lawsuits, and authorities in more than 30 countries have taken or are considering taking actions to address such fees and other card network practices. Proposals for reducing interchange fees in the United States or other countries have included (1) setting or limiting interchange fees, (2) requiring their disclosure to consumers, (3) prohibiting card networks from imposing rules on merchants that limit their ability to steer customers away from higher-cost cards, and (4) granting antitrust waivers to allow merchants and issuers to voluntarily negotiate rates. If these measures were adopted here, merchants would benefit from lower interchange fees. Consumers would also benefit if merchants reduced prices for goods and services, but identifying such savings would be difficult. Consumers also might face higher card use costs if issuers raised other fees or interest rates to compensate for lost interchange fee income. Each of these options also presents challenges for implementation, such as determining at which rate to set, providing more information to consumers, or addressing the interests of both large and small issuers and merchants in bargaining efforts.