Because issuing banks incur costs to issue cards to  consumers, the interchange fee helps to allocate these costs among the  parties involved in card transactions. The merchant discount fees charged on American Express and Discover  transactions are, however, set to cover some of the same types of costs  that merchant discount fees (which include interchange fees) cover for  Visa and MasterCard transactions. Federal Entities Are Taking Steps to Control Costs while Realizing the Benefits Associated with Accepting Credit and Debit Cards

Federal entities realize benefits from accepting credit and debit cards,  including increased customer satisfaction, fewer bad checks and cash  thefts, and improved operational efficiency. Some entities also stated that the ability to accept cards  has increased their sales volume. Data on  revenues collected by FMS, which processes the card transactions for a  large number of federal executive, legislative, and judicial branch agencies  and other federal entities, show that while credit and debit card  transactions accounted for only 0.23 percent of the total federal  government revenues FMS collected in fiscal year 2007, its card  collections have grown by almost 28 percent in just 2 years—from  approximately $5.5 billion in fiscal year 2005 to almost $7.1 billion in fiscal  year 2007 (in current dollars). As card revenues and merchant discount fees  increased for these three entities, so did the interchange fees they paid. Both Visa and MasterCard have a merchant category for  federal entities, and the interchange rates for the transactions of  merchants in these categories are lower than those for many other  merchant categories. Federal Entities Have Attempted to Negotiate Lower Fees

Another way in which federal entities have acted to reduce card  acceptance costs is by negotiating with their acquiring banks for lower  merchant discount rates or with card networks for lower interchange  rates. FMS Has Begun a Program to Identify Cost Savings Opportunities, but Has Yet to Develop a Full Implementation Strategy

In addition to looking for opportunities to reduce card acceptance costs,  FMS has initiated a program to review the overall cash management  practices of federal entities. Since that time rates have declined. Limited Information on the Effects of Interchange Rate Intervention Suggests Some Benefit to Merchants and a Mixed Picture for Consumers

In the three countries we examined, incomplete information is available  on the impact of actions to reduce interchange rates, but available data  indicate that merchants appear to have benefited, while the impact on  consumers has been mixed. Federal entities pay no direct costs for the general use of cards. In fiscal year 2007, federal entities used cards to purchase more than $27  billion of goods and services. Officials from several entities also told us that cards allow them to make  purchases more quickly and/or more conveniently than previously used  methods of purchasing. In collecting over $27 billion in revenue via cards in 2007, the transactions  of federal entities included within the scope of this report resulted in more  than $430 million in merchant discount fees, including at least $205 million  in interchange fees (paid by entities that provided us with data specifically  on interchange fees). Further  adding to the difficulty of estimating the potential effects of such actions  in the United States, are differences in the structure and regulation of the  U.S. card payment market from those of the other countries we examined. In addition to  increased efficiency in administrative processes and cost savings, in fiscal  year 2007 card use also produced about $175 million in additional  operating funds through the rebates provided by the banks that issue  government cards. Such a strategy  should include a timeline for completing the reviews, cost savings  estimates associated with individual reviews, and an assessment of the  adequacy of the resources committed to the program. Appendix I: Objectives, Scope, and Methodology

Our objectives were to examine (1) the benefits and costs, including  interchange fees, associated with federal entities’ acceptance of cards as  payment for the sale of goods, services, and revenue collection; (2) actions  taken in countries that have regulated or otherwise limited interchange  fees and their impact; and (3) the impact on federal entities of using cards  to make purchases. We reviewed  data for these entities as well.
Why GAO Did This Study

Federal entities--agencies, corporations, and others--are growing users of credit and debit cards, as both "merchants" (receiving payments) and purchasers. Merchants accepting cards incur fees--called merchant discount fees--paid to banks to process the transactions. For Visa and MasterCard transactions, a large portion of these fees-- referred to as interchange--goes to the card-issuing banks. Some countries have acted to limit these fees. GAO was asked to examine (1) the benefits and costs associated with federal entities' acceptance of cards, (2) the effects of other countries' actions to limit interchange fees, and (3) the impact on federal entities of using cards to make purchases. Among other things, GAO analyzed fee data and information on the impact of accepting and using cards from the Department of the Treasury (Treasury) and the General Services Administration, reviewed literature, and interviewed officials of major card companies and three foreign governments.

What GAO Found

By accepting cards, federal entities realize benefits, including more satisfied customers, fewer bad checks and cash thefts, and improved operational efficiency. In fiscal year 2007, federal entities accepted cards for over $27 billion in revenues and paid at least $433 million in associated merchant discount fees. For those able to separately identify interchange costs, these entities collected $18.6 billion in card revenues and paid $205 million in interchange fees. Federal entities are taking steps to control card acceptance costs, including reviewing transactions to ensure that the lowest interchange rates--which can vary by merchant category, type of card used, and other factors--are assessed. While the Visa and MasterCard card networks have established lower interchange rates for many government transactions, some federal entities have attempted to negotiate lower ones, with mixed success. To identify savings from cards and other collection mechanisms, Treasury's Financial Management Service (FMS)--which handles revenues and pays merchant discount fees for many federal entities--initiated a program in 2007 to review each entity's overall revenue collections. FMS has identified potential efficiency and cost saving improvements at the eight entities it has reviewed thus far, but has yet to develop a full implementation strategy-- including a timeline for completing all reviews, cost savings estimates, and resource assessment--that could help expeditiously achieve program goals. Several countries have taken steps to lower interchange rates, but information on their effects is limited. Among the three countries GAO examined, regulators in Australia and Israel intervened directly to establish limits on interchange rates, while Mexico's banking association voluntarily lowered some rates. Since Australia's regulators acted in 2003, total merchant discount fees paid by merchants have declined, but no conclusive evidence exists that lower interchange fees led merchants to reduce retail prices for goods; further, some costs for card users, such as annual and other fees, have increased. Few data exist on the impact of the actions taken in Mexico (beginning in 2004) and Israel (beginning in the late 1990s). Because of the limited data on effects, and because the structure and regulation of credit and debit card markets in these countries differ from those in the United States, estimating the impact of taking similar actions in the United States is difficult. Federal officials cited various benefits from card use--which totaled more than $27 billion in fiscal year 2007, a 51 percent increase since fiscal year 1999 after adjusting for inflation--including the ability to make purchases more quickly and with lower administrative costs than with previously used purchasing methods. The banks that issue cards to federal entities also rebate a small percentage of their card purchase amounts; these rebates totaled $175 million in fiscal year 2007. Preventing inappropriate card use poses challenges, and GAO and others have identified inadequate controls over various agencies' card programs. However, tools and data provided by the issuing banks now allow entities to review transactions more quickly, increasing their ability to detect suspicious transactions.