GAO 

United States Government Accountability Office

Report to Congressional Addressees

CREDIT CARDS 

Rising Interchange 

Fees Have Increased 

Costs for Merchants, 

but Options for 

Reducing Fees Pose 

Challenges 

November 2009 

GAO-10-45 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

November 2009

CREDIT CARDS

Rising Interchange Fees Have Increased Costs for 

Merchants, but Options for Reducing Fees Pose 

Highlights of GAO-10 45 - , a report to Challenges

congressional addressees 

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. 

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. 

View GAO-10-45 or key components.

For more information, contact Alicia Puente 

Cackley at (202) 512-8678 or 

cackleya@gao.gov. 
Page i GAO-10-45 

Contents 

Letter 1

Background 3 

Fees Merchants Pay for Accepting Credit Cards Have Increased 

over Time and May Be Related to Competition for Issuers in the 

Credit Card Market 13 

While Competition among Issuers Has Increased Benefits and 

Lowered Costs for Some Cardholders, Other Consumers May Be 

Negatively Affected by Increased Card Use 25 

Although Accepting Credit Cards Provides Benefits, Merchants 

Report Card Costs Are Increasing Faster and Their Ability to 

Negotiate or Lower These Costs Is Limited 29 

Although Various Options to Lower Interchange Fees Exist, 

Impacts on Cardholders Could Be Mixed and Each Option Has 

Implementation Challenges 44 

Agency Comments and Our Evaluation 48 

Appendix I Objectives, Scope, and Methodology 50 

Appendix II Review of Options to Regulate Interchange Fee 

Rates and Terms of Credit Card Acceptance 53 

Appendix III GAO Contact and Staff Acknowledgments 64 

Tables 

Table 1: Ten Largest Credit Card Issuers as of Year-end 2008 6 

Table 2: Changes in Visa and MasterCard Domestic Credit Card 

Interchange Fee Rates, Numbers, and Average Rates, 1991 

and 2009 15 

Table 3: Litigation Involving Card Network Practices 42 

 Credit Card Interchange Fees 
Figures 

Figure 1: Growth in Credit Card Usage from 1993 to 2007 5 

Figure 2: Transfer of Fees in a Credit Card Transaction 8 

Figure 3: Changes in Interchange Fee Costs from 2000 to 2009 17 

Figure 4. Return on Assets, Large U.S. Credit Card Banks, 1986-

2008 and All FDIC-Insured Commercial Banks, 1988-2008 24 

Abbreviations 

DOJ Department of Justice 

FDIC Federal Deposit Insurance Corporation 

FTC Federal Trade Commission 

OCC Office of the Comptroller of the Currency 

PIN personal identification number 

RBA Reserve Bank of Australia 

TILA Truth in Lending Act 

This is a work of the U.S. government and is not subject to copyright protection in the 

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Page ii GAO-10-45 Credit Card Interchange Fees
Page 1 GAO-10-45 

United States Government Accountability Office

Washington, DC 20548 

 

November 19, 2009 

The Honorable Christopher J. Dodd 

Chairman 

The Honorable Richard C. Shelby 

Ranking Member 

Committee on Banking, Housing, and Urban Affairs 

United States Senate 

The Honorable Olympia J. Snowe 

Ranking Member 

Committee on Small Business and Entrepreneurship 

United States Senate 

The Honorable Benjamin L. Cardin 

The Honorable Tom Harkin 

United States Senate 

The Honorable Barney Frank 

Chairman 

The Honorable Spencer Bachus 

Ranking Member 

Committee on Financial Services 

House of Representatives 

Consumers are increasingly using credit cards to make payments for 

goods and services. 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 and distributed among the 

merchant’s financial institution, the financial institution that issued the 

card, and the card network that processes the transaction. The majority of 

this amount generally is called the interchange fee and goes to the 

financial institution that issued the card. As card use has become more 

popular, the costs for merchants of accepting them have been rising, and 

considerable debate has been occurring over these costs, and particularly 

the level of interchange fee rates. In the United States, merchants have 

sued the card networks several times over card acceptance rules and 

costs. Several congressional committees have held hearings on the topic of 

interchange fees and Members of Congress have introduced legislation 

regarding interchange fees. 

 Credit Card Interchange Fees 
 

In May 2009, Congress passed and the President signed the Credit Card 

Accountability Responsibility and Disclosure Act of 2009 (CARD Act), 

which directed us to conduct a study of credit card interchange fees.1

 In 

addition, we were asked by members of the Senate Small Business 

Committee to review the market for interchange fees. In response to both, 

we reviewed (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. 

To address our objectives, we reviewed economic and other academic 

literature and analyzed industry data on the structure of the credit card 

payment market and merchants’ reported fees for payment acceptance.2

We reviewed materials provided to us by the card networks about the 

structure of interchange fees, how those fees have changed over time, and 

the rules for payment card acceptance. We also conducted interviews with 

more than 80 organizations, including U.S. federal banking and other 

regulators, academic researchers, and industry participants. We also 

interviewed and obtained information from regulatory officials in 

Australia, which took actions regarding interchange fees in 2003. To learn 

how card issuers compete to attract cardholders and the role of 

interchange fee revenue, we interviewed representatives from national 

banking associations, from some of the largest credit card issuing banks, 

and from credit unions and community banks from across the United 

States. To learn more about the role of acquiring institutions and 

processors, we met with an acquiring bank association and several large 

acquiring banks and merchant data processors. To learn more about the 

fees merchants pay for card acceptance, we met with representatives of 

large merchant groups from a variety of industries, including mass market 

retailers, grocery store chains, and online retailers. These merchants 

represent some of the largest retailers in the United States, including eight 

that represented 42 percent of the wholesale and retail trade industries 

listed in the S&P 500 in 2008. In addition, we obtained and analyzed data 

provided by large merchants, merchant associations, and a large credit 

 

1

Pub. L. No. 111-24 § 501, 123 Stat. 1734, 1754 (2009). 

2

For this report, we focused on the structure of fees for accepting credit cards, not debit 

cards, although the fees for debit cards play a role in factors affecting the competitiveness 

of the overall payment card market. 

Page 2 GAO-10-45 Credit Card Interchange Fees
 

card processor on the costs of accepting credit cards and interchange fee 

changes over time. This information was used to corroborate some of the 

statements they made about the benefits of card use, but we did not 

independently verify these data. In general, publicly available data on 

interchange fee revenues, card issuer costs, and other quantitative 

information are limited or data could not be provided because of 

contractual restrictions or ongoing litigation. We also selected small 

merchants to interview from the Washington, D.C., and Springfield, 

Virginia, Chambers of Commerce. These merchants represented a diverse 

group of businesses, including boutique shops, sports clubs, and a health 

care professional. Our interviews with industry participants, academics, 

and regulators also provided us with an understanding of the potential 

impact of various options to lower credit card fees. See appendix I for 

more detailed information on our scope and methodology. 

We conducted our work from May 2009 to November 2009 in accordance 

with generally accepted government auditing standards. Those standards 

require that we plan and perform the audit to obtain sufficient, appropriate 

evidence to provide a reasonable basis for our findings and conclusions 

based on our audit objectives. We believe that the evidence obtained 

provides a reasonable basis for our findings and conclusions based on our 

audit objectives. 

Payment card use has grown dramatically since the introduction of cards 

in the beginning of the 20th century. Hotels, oil companies, and 

department stores issued cards associated with charge accounts before 

World War I. In 1950, Diners Club established the first general purpose 

charge card that allowed its cardholders to purchase goods and services 

from many different merchants. In the late 1950s, Bank of America began 

offering the BankAmericard, one of the first general purpose credit cards. 

Unlike charge cards that require the balance to be paid in full each month, 

credit cards allow cardholders to make purchases up to a credit limit and 

pay the balance off over time. To increase the number of consumers 

carrying the card and to reach retailers outside of Bank of America’s area 

of operations, other banks were given the opportunity to license Bank of 

America’s credit card. As the network of banks issuing these credit cards 

expanded, the network was converted into a membership-owned 

corporation that became the Visa network. MasterCard began in 1966 as an 

association of member-owned banks. American Express launched its card 

network in 1958, and in the 1980s, Discover, then a business unit of Sears, 

issued Discover card. In 2006, MasterCard became a publicly traded 

company with a board of directors with a majority of directors that are 

Background 

Page 3 GAO-10-45 Credit Card Interchange Fees
 

independent from their financial institution customers. Visa became a 

publicly traded company in 2008, and its financial institution members 

became common stockholders with a minority of shares. 

Today, customers can choose among different types of payment cards. 

Consumers can use debit cards with a personal identification number 

(PIN) they enter on payment or with a signature. The payment is 

transferred directly from the cardholder’s account to the merchant’s 

account. With a debit card, the payment comes from the cardholder’s 

checking account. Credit cards allow cardholders to access borrowed 

funds to make a purchase and generally have a grace period between the 

purchase of an item and the payment date. Then the cardholder can pay 

the charges in full or extend the loan and keep making charges to the 

credit limit. Cardholders who do not pay for the charges in full are 

assessed finance charges by their financial institution and pay interest on 

the remaining balance. Credit cards offer cardholders several benefits, 

including 

• faster transactions, 

• the convenience of not having to carry cash or a checkbook, 

• a convenient source of unsecured credit that allows consumers to finance 

their purchases over time, 

• an interest-free period to finance purchases if balances are paid on time,3

• improved theft and loss prevention as compared with cash and easier 

dispute resolution in the event of problems,4

 and 

• an easy record-keeping mechanism that can be useful for budgeting, 

planning, and income tax preparation. 

 

3

Typically, cardholders with no outstanding balance on their account have at least 21days 

from the date of purchase to the date their credit card bill is due in which they are not 

charged interest. 

4

The Truth in Lending Act, generally limits consumers’ liability for the unauthorized use of 

their cards to $50. See 12 CFR 226.12. 

Page 4 GAO-10-45 Credit Card Interchange Fees
 

The number of credit cards in circulation and the extent to which they are 

used has also grown dramatically. The range of goods and services that 

can be purchased with credit cards has expanded, with cards now being 

used to pay for groceries, health care, and federal and state income taxes. 

In 2007, U.S. consumers held more than 694 million credit cards from Visa, 

MasterCard, American Express, and Discover, and as shown in figure 1, 

the total value of transactions for which these cards were used exceeded 

$1.9 trillion, according to data from the Card Industry Directory.

5

Consumer Use of Credit 

Cards Has Grown 

Dramatically, while a Few 

Large Banks Have Come to 

Account for Most Card 

Issuance 

Figure 1: Growth in Credit Card Usage from 1993 to 2007 

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Value of transactions (2007 dollars in billions)

0

3

6

9

12

15

18

21

24

27

30

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Number of transactions (in billions)

Source: SourceMedia. Card Industry Directory, 20th edition. GAO adjusted the transaction values for inflation and the values are 

reported in 2007 dollars.

Year

Value of transactions

Number of transactions

Note: From 2003, the transaction value data from Visa and MasterCard represent purchase volume 

only. Before 2003, data included cash disbursements. 

 

5

This includes both consumer and commercial credit card charge volume. See Card 

Industry Directory: The Blue Book of the Credit and Debit Card Industry in North 

America, 20th ed. (Chicago, Ill., 2008). SourceMedia, the publisher of the Card Industry 

Directory, told us that the 20th edition is the last edition that will be published and that its 

information has migrated into a Web-based product called PaymentsSource. 

Page 5 GAO-10-45 Credit Card Interchange Fees
 

Many of the largest issuers of credit cards in the United States are 

commercial banks, including many of the largest banks in the country. 

More than 6,000 depository institutions issue credit cards, but over the 

past decade, the majority of accounts increasingly have become 

concentrated among a small number of large issuers. Table 1 shows the 

largest bank issuers of credit cards as of the end of 2008, and their 

percentage of the total United States credit card market, according to an 

industry newsletter. 

Table 1: Ten Largest Credit Card Issuers as of Year-end 2008

Card issuer 

Percentage of total U.S. credit card 

market by credit card balances 

outstanding

JPMorgan Chase 21

Bank of America 19

Citi 12

American Express 10

Capital One 7

Discover 6

Wells Fargo 4

HSBC 3

U.S. Bank 2

USAA Savings 2

Total 88

Source: GAO analysis of data from The Nilson Report, April 2009, Issue 923. 

In addition, community banks, thrifts, and credit unions each issue credit 

and debit cards. According to information provided by banking regulators 

and banking associations, about 75 percent of community banks, 49 

percent of credit unions, and 13 percent of thrifts issue credit cards. 

Transactions through Card 

Networks Involve Multiple 

Parties and Fees 

Merchants’ costs of payment card acceptance involve several different 

fees that are divided among the parties involved in a credit card 

transaction. The parties involved in processing credit card transactions 

vary depending on the network used by the card. The United States has 

four primary general purpose credit card networks. For the two largest 

networks—Visa and MasterCard—transactions involve four parties: (1) the 

financial institution that issued a cardholder’s card, (2) the cardholder, 

(3) the merchant that accepts the cardholder’s card, and (4) an acquiring 

financial institution. A merchant that accepts Visa or MasterCard credit 

Page 6 GAO-10-45 Credit Card Interchange Fees
 

cards enters into a contract with an acquiring institution that has a 

relationship with Visa or MasterCard (or both) to provide card payment 

processing services. The merchant’s contract with the acquiring institution 

or its agent specifies the level of services the merchant receives, as well as 

the merchant discount fee and other fees that will apply to the processing 

of the merchant’s card transactions.6

 The acquiring institution charges the 

merchant a merchant discount fee that is established through negotiations. 

The majority of the merchant discount fee is generally paid from the 

acquiring institution to the issuing institution in the form of an interchange 

fee. A merchant does not pay the interchange fee directly. Rather, the Visa 

or MasterCard network transfers the interchange fee portion of the 

merchant discount fee from the acquiring institution to the issuing 

institution. The acquiring institution retains the balance of the merchant 

discount fee to cover its costs for processing the transaction.7

 Figure 2 

illustrates the four parties in a typical credit card transaction and how fees 

are transferred among the parties. In this example, when a cardholder 

makes a $100 purchase, the merchant pays $2.20 in merchant discount fees 

for the transaction. This amount is divided between the issuing institution, 

which received $1.70 in interchange fees, and the acquiring institution, 

which receives 50 cents for processing the transaction. 

 

6

Although Visa and MasterCard only permit acquiring institutions to authorize transactions 

on their networks, these institutions may partner with a third-party processor or 

independent sales organization to directly contract with merchants. 

7

Visa and MasterCard receive payments directly from participating issuing and acquiring 

institutions based on processing and payment volume. 

Page 7 GAO-10-45 Credit Card Interchange Fees
 

Figure 2: Transfer of Fees in a Credit Card Transaction 

Pays full amount

Keeps $1.70 

interchange fee

Pays merchant discount

fee of $2.20

Keeps $0.50 for

acquiring fee

$97.80

Cardholder Merchant

Sources: GAO (analysis); Art Explosion (images). 

5555-5555-5555-5555

CreditCard

Submits transaction

data for authorization:

$100

Merchant

paid $97.80

($100-$2.20

discount)

Issuer Acquirer

Card network

(Visa and MasterCard)

Cardholder transaction:

Interchange fee:

Card network pays acquirer:

Acquirer pays merchant:

Processing fee paid to acquirer:

1.70% Interchange rate

2.20% Merchant discount rate

$100.00

1.70

$98.30

$97.80

$0.50

B

A

C

Pays Issuer D

Issuer approves transaction and transfers

$98.30 through the card network to 

the acquirer ($100-$1.70 interchange fee)

$100 credit card purchase

Bills

cardholder

$100

$98.30

F E $100

Note: Individual credit transactions vary considerably, as do the terms of merchant acquiring 

contracts. 

For transactions on the other two major card networks—American 

Express and Discover—generally only three parties are involved: the 

cardholder, the merchant, and one company that acts as both the issuing 

Page 8 GAO-10-45 Credit Card Interchange Fees
 

and acquiring entities.8 Merchants that choose to accept these two types of 

cards typically negotiate directly with American Express and Discover 

over the merchant discount fees that will be assessed on their 

transactions. 

Acquiring institutions provide the means for merchants to accept credit 

cards, by forwarding the request for authorization through the card 

network to the cardholder’s issuing institution. The issuing institution 

authorizes the transaction by verifying that the account is valid and that 

the cardholder has a sufficient amount of credit for the sale. For 

merchants accepting cards in their stores, authorization generally occurs 

automatically through electronic point-of-sale terminals that read cards. 

Acquiring institutions clear and settle card purchases by providing 

payment from the issuing institution to the merchant’s account, except for 

the interchange fees and their own service fees. According to industry 

estimates, the process takes between 24 and 72 hours for the merchant to 

receive payment. Acquiring institutions also assume the risks of a 

merchant defaulting on the promise of goods. For example, if a merchant 

becomes bankrupt, its acquiring institution is responsible for settling 

claims with the network and issuers whose cardholders are waiting for 

goods or services. 

Interchange Fees 

Represent the Largest 

Portion of Credit Card 

Payment Acceptance Fees 

Interchange fees generally account for the largest portion of the fees for 

acceptance of Visa and MasterCard credit cards. The card networks set the 

fees, which vary based on several factors and generally range from 1 to 3 

percent of the purchase price. Card network officials told us that they 

have developed lower rates to encourage certain merchants to accept their 

 

8

In the United States, since 2004 American Express has licensed a number of banks such as 

Bank of America to issue cards on the American Express network; however, it continues to 

act as the acquiring entity for merchants. Financial arrangements between American 

Express and third-party bank issuers are agreed upon independently, through separate 

bilateral agreements, and usually constitute a percentage of the transaction amount. 

Discover also has had card-issuing agreements with financial institutions such as GE 

Money Bank since 2004, and since 2006 has had merchant acquiring agreements with third 

parties. For transactions that occur on Discover cards issued by these third-party issuers at 

merchants having acceptance agreements with third-party acquirers, Discover receives 

interchange revenue from the acquiring institution and pays the card issuer an interchange 

fee. 

Page 9 GAO-10-45 Credit Card Interchange Fees
 

cards.9 Acquiring banks and card network representatives also told us that 

certain merchants and transaction types are considered more risky than 

others and pay higher interchange fees for accepting card payments. 

According to Visa and MasterCard officials, four main factors determine 

which interchange fee rates apply to a given transaction on their networks: 

• Type of card: Different rates apply to different types of cards. Visa and 

MasterCard have separate interchange fee rates for general purpose 

consumer cards, rewards credit cards, commercial credit cards (issued to 

businesses), and debit cards. Debit card interchange fees generally are 

lower than those for credit cards. Among credit cards, premium cards 

such as those offering rewards and commercial cards generally have 

higher rates than those for standard or traditional cards. 

• Merchant category: Card networks classify merchants according to their 

line of business. Network officials told us they develop lower interchange 

fee rates for industries that do not accept cards to encourage merchants in 

certain categories to accept cards. For example, grocery stores and 

utilities have lower interchange fees as a special incentive from the 

networks. Interchange fee rates are higher for merchants in industries 

such as travel and entertainment, in which network officials report 

customers spend more with their credit cards, providing the merchant 

with higher value. 

• Merchant size (transaction volume): Merchants with large volumes of card 

transactions generally have lower interchange fee rates. Visa categorizes 

some merchants into three tiers based on transactions and sales volume, 

with top-tier merchants receiving the lowest rate. Visa and MasterCard 

officials told us that the lower rates also were designed to promote the use 

of their cards over other credit cards and forms of payment. 

• Processing mode: Interchange fee rates also vary depending on how card 

transactions are processed. For example, transactions that occur without 

the card being physically present, such as on the Internet, have higher 

 

9

In addition, merchants may receive lower costs for card acceptance if they enter into a 

special relationship with a network or issuing bank. A co-branded card has the merchant’s 

name and logo on it and can be used in the merchant’s stores or in other locations. A 

private label card also has the merchant’s name and logo on it, but can be used only to 

purchase goods and services from that merchant. Both types of cards offer incentives for 

merchants to promote the cards among their customer base. Representatives from large 

issuers told us that incentives could include a rebate on their interchange fees. We discuss 

co-branded card relationships in more detail later in this report. 

Page 10 GAO-10-45 Credit Card Interchange Fees
 

interchange fee rates because of the higher risk of fraud. Similarly, swiping 

a card through a card terminal, rather than manually entering the account 

number, would lower a merchant’s interchange rate. 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. 

Merchants generally learn of changes to their rates for accepting Visa and 

MasterCard cards through their acquiring institution. Smaller merchants 

generally receive one or more flat fees (known as a blended rate) for 

payment acceptance that include both the interchange fee and the 

acquiring institution’s fee. For merchants with blended rates, the costs of 

acceptance are uniform for each card type and interchange fee rates may 

not be disclosed on statements as a separate fee. In contrast, larger 

merchants generally receive detailed statements from their acquiring 

institution and card processors, which include interchange fee categories, 

network fees, and fees from the acquiring institution. These statements 

reflect “cost-plus” rates, because the acquiring institution provides the 

merchant with the details of the costs passed on from the network along 

with the acquiring institution’s own fees. Visa and MasterCard develop and 

publish interchange rate tables (available on their Web sites) that disclose 

the default rates that apply to various types of transactions. Visa and 

MasterCard typically publish new interchange schedules twice a year. 

Oversight of the Payment 

Card Market and Recent 

Legislative Initiatives 

Various federal agencies oversee credit card issuers. The Federal Reserve 

oversees issuers that are chartered as state banks and are also members of 

the Federal Reserve System. The Office of the Comptroller of the Currency 

(OCC) supervises card issuers chartered as national banks. Other 

regulators are the Federal Deposit Insurance Corporation (FDIC), which 

oversees state-chartered banks with federally insured deposits that are not 

members of the Federal Reserve System; the Office of Thrift Supervision, 

which oversees federally chartered and state-chartered savings 

associations with federally insured deposits; and the National Credit 

Union Administration, which oversees federally chartered and statechartered credit unions whose accounts are federally insured. As part of 

their oversight, these regulators review card issuers’ compliance with the 

Truth In Lending Act (TILA)—the primary federal law pertaining to the 

extension of consumer credit—and ensure that an institution’s credit card 

Page 11 GAO-10-45 Credit Card Interchange Fees
 

operations do not pose a threat to the institution’s safety and soundness.10

The Federal Trade Commission (FTC) generally has responsibility for 

enforcing TILA and other consumer protection laws for credit card issuers 

that are not subject to the enforcement authority of other federal 

regulators. To the extent that the imposition of interchange fees would 

constitute an anticompetitive or unfair business practice prohibited by the 

antitrust laws or the Federal Trade Commission Act, the Department of 

Justice (DOJ) and FTC, respectively, could take measures to ensure 

compliance with those laws. 

Interchange fees are the subject of several federal legislative proposals. 

The Credit Card Fair Fee Acts of 2009, introduced in June 2009, would, 

among other things, establish a process by which merchant groups and 

providers of access to credit card networks could negotiate interchange 

fees and other terms of network participation under an exemption from 

federal antitrust laws.11 The interchange fee would be made publicly 

available. Another proposal would require credit and debit card networks 

to remove constraints placed on merchants for card acceptance, such as 

requiring merchants to accept all cards from a particular network, and 

require issuers to disclose networks’ fees to credit card users.12

 

10The Federal Reserve also has oversight of the debit card market under the Electronic 

Fund Transfer Act (EFTA), 15 U.S.C. § 1693, et. seq., implemented through Regulation E, 

which, among other things, contains disclosure requirements relating to the use of debit 

cards at merchant terminals. See 12 C.F.R. Part 205. 

11This proposal was introduced as S. 1212 and as H.R. 2695. 

12This proposal was introduced as H.R. 2382, captioned the “Credit Card Interchange Fees 

Act of 2009.” 

Page 12 GAO-10-45 Credit Card Interchange Fees
 

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. As Visa and 

MasterCard have sought to attract new merchants to accept and issuers to 

offer their cards, the number of different interchange fee categories has 

grown. In addition, as the networks compete to attract financial 

institutions to issue cards on their networks, they may have increased 

their interchange fees to provide issuers with greater revenue from the 

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.13 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. 

Fees Merchants Pay 

for Accepting Credit 

Cards Have Increased 

over Time and May Be 

Related to 

Competition for 

Issuers in the Credit 

Card Market 

 

13Businesses can possess market power when they have the ability to raise prices without 

suffering significant declines in business. The presence of market power is associated with 

factors in the marketplace such as a limited number of competitors and conditions that can 

create barriers for other businesses attempting to enter into the particular marketplace. 

DOJ and FTC examine the structure of the market to determine whether businesses 

exercise their market power in ways that are considered anticompetitive according to U.S. 

antitrust laws. 

Page 13 GAO-10-45 Credit Card Interchange Fees
 

The amount of fees that merchants pay for card transactions has been 

increasing in recent years, in part because of the increasing use of credit 

cards to make payments. The Federal Reserve recently estimated that the 

use of both checks and cash have declined, or at least grown more slowly 

than credit and debit card use, since the mid-1990s as more consumers 

switched to electronic forms of payment.14 According to data from the 

American Bankers Association, since 2005 more than half of total retail 

transactions have been paid for using cards (either debit or credit).15

Although the total value of fees that merchants paid for card transactions 

as well as the total value of interchange fees are not publicly available, 

economists at the Federal Reserve estimated that the value of interchange 

fees paid on Visa and MasterCard credit and debit cards has increased 

substantially, from about $20 billion in 2002 to approximately $35 billion to 

45 billion in 2007.16 As the total amount of interchange fees increased, so 

did merchants’ total fees for accepting cards. 

Reasons for the Increase in 

Merchant Card Acceptance 

Costs Include Consumers’ 

Increasing Use of Credit 

and Debit Cards and 

Increases in Fee Rates 

Merchants’ card acceptance costs also have been increasing as a result of 

rising average interchange fee rates. Visa and MasterCard officials told us 

that their average effective interchange rates applied to transactions have 

remained fairly constant in recent years when transactions on debit cards, 

which have lower interchange fee rates, are included. However, our own 

analysis of Visa and MasterCard interchange rate schedules shows that the 

interchange rates for credit cards have been increasing and their 

structures have become more complex, as hundreds of different 

interchange fee rate categoriess for accepting credit cards now exist (see 

table 2). According to our analysis, in 1991, Visa and MasterCard each had 

4 standard domestic credit card interchange fee rate categories, but by 

 

14See Robin A. Prager, Mark D. Manuszak, Elizabeth K. Kiser, and Ron Borzekowski, 

“Interchange Fees and Payment Card Networks: Economics, Industry Developments, and 

Policy Issues.” (Working Paper 2009-23, Federal Reserve Board Divisions of Research & 

Statistics and Monetary Affairs, Washington, D.C.: May 13, 2009). Data from The Nilson 

Report, an industry newsletter, indicates that since 2006, debit card purchases represent a 

greater share of transaction volume than credit card purchases. See The Nilson Report, 

November 2008, Issue 915. 

15American Bankers Association/Dove Consulting. “2005/2006 Study of Consumer Payment 

Preferences” (Washington, D.C.: October 2005). 

16Federal Reserve officials told us these numbers were calculated by multiplying the 

average interchange fee rate times the total amount of card payments for Visa and 

MasterCard credit, signature debit, and PIN debit cards. They noted that because they 

could not determine the volume of payments associated with each of the many interchange 

fee categories, this is a crude estimate and should be viewed as a rough approximation of 

the total. See Prager et al. 

Page 14 GAO-10-45 Credit Card Interchange Fees
 

2009, Visa had 60 and MasterCard had 243 different rate categories that 

could be charged to card transactions, although not all of these rates 

would apply to all merchants.17 According to card network officials, the 

increase in the number of rates occurred as different types of merchants 

and cards were added to their interchange rate schedules. For example, 

the networks introduced new rates for certain industries that previously 

had not accepted cards (such as energy utility companies or government 

agencies) or for new methods of shopping (such as online purchases). In 

addition to the increase in the number of interchange fee rates, the 

maximum domestic credit card interchange fee per transaction also has 

increased, as shown in table 2. While some of the networks’ interchange 

fee rates remained the same during this time and a few decreased, another 

reason merchant card acceptance costs are increasing may be that 

individual interchange fee rates also are increasing. According to our 

analysis, from 1991 to 2009, 43 percent of the individual Visa rates and 45 

percent of the MasterCard rates that prevailed in 2009 had been increased 

since they were originally introduced. 

Table 2: Changes in Visa and MasterCard Domestic Credit Card Interchange Fee 

Rates, Numbers, and Average Rates, 1991 and 2009 

Changes in rates from 1991 and 2009 Visa MasterCard

Number of interchange rate categories in 1991 4 4

Number of interchange rate categories in 2009 60 243

Range of interchange rates in 1991 1.25% to 1.91% 1.30% to 2.08%

Range of interchange rates in 2009 0.95% to 2.95% 0.90% to 3.25%

Percentage of rates that increased 43% 45%

Percentage of rates that stayed the same 45% 45%

Percentage of rates that decreased 12% 10%

Source: GAO analysis of Visa and MasterCard interchange fees schedules. 

Note: Any additional transaction fees or rates that were not based on a percentage of the total sales 

amount were excluded from this analysis. For example, Visa has a flat fee of 75 cents for payments 

accepted by utility companies. Analysis of increases or decreases in rates compared each rate when 

initially introduced with its level as of April 2009. 

Our interchange fee rate analysis showed that the interchange fee rates 

that increased the most during this period were for some standard card 

 

17Visa officials noted that some of these interchange rate categories have the same rate. In 

addition, they reported that at least one category was added as a processing alternative 

provided to acquiring institutions. 

Page 15 GAO-10-45 Credit Card Interchange Fees
 

types. For example, the rate that applied to MasterCard transactions using 

basic nonrewards credit cards at merchants that would not otherwise 

qualify for a special rate—called Merit III base—was 1.30 percent in 1991 

and 1.58 percent in April 2009—representing a 22 percent increase.18 A 

similar rate for Visa—known as CPS/Retail Credit—increased from 1.25 

percent to 1.54 percent, or 23 percent, from 1995 to April 2009. In addition, 

several of the networks’ higher interchange fee rates also increased during 

this period. For example, both networks’ corporate card (issued to 

business customers) interchange fee rates increased considerably—Visa 

by 36 percent and MasterCard by 82 percent. Rates on other cards that had 

lower-cost incentive rates for sectors that previously did not take cards 

also increased. For example, MasterCard’s interchange rate for standard 

credit cards used at a supermarket increased nearly 29 percent, from an 

introduction at 1.15 percent in 1998 to 1.48 percent in 2009. 

Analysis by Federal Reserve staff also showed that interchange fee rates 

have increased, particularly for premium cards that have higher rates than 

basic cards.19 As shown in figure 3, the interchange fee costs for Visa’s and 

MasterCard’s premium cards have increased about 24 percent since they 

were introduced in 2005. Interchange fee costs for basic credit cards have 

stayed roughly the same since 2005, with a 3-percent decline for 

MasterCard and none for Visa. 

 

18Merchants that qualified for special rates for MasterCard included restaurants, 

convenience stores, supermarkets, and warehouse stores. 

19See Prager and others. 

Page 16 GAO-10-45 Credit Card Interchange Fees
 

Figure 3: Changes in Interchange Fee Costs from 2000 to 2009 

Source: GAO analysis based on publicly available data collected by the Federal Reserve.

0.5

0.6

0.7

0.8

0.9

1.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Dollars

Visa (basic)

MasterCard (basic)

MasterCard (premium)

Visa (premium)

Note: Interchange fees displayed assume a $40 purchase at a typical merchant. Fees are reported 

for each month in each year. Thicker lines are for premium cards. 

Although limited information about cost trends for accepting cards exists 

for American Express and Discover, the rates these two networks charge 

have not generated the same level of concern as those of the other 

networks, in part because they are less widely used. Information on the 

rates that American Express and Discover charge merchants to accept 

their cards is limited; these networks do not publish the rates they charge 

merchants, but instead generally negotiate these charges with merchants 

on an individual basis. As discussed previously, American Express and 

Discover, for large merchants, generally serve as both the issuer and 

acquirer of their cards, so merchants’ fees for accepting those cards 

represent their entire merchant discount fee. Representatives from 

American Express told us that they do not have interchange fees but 

instead contract directly with merchants for a fixed merchant discount 

rate for all types of American Express cards. Discover officials told us that 

Discover is moving from a single rate for each merchant that applies to all 

of their cards to a tiered interchange fee model, with higher interchange 

Page 17 GAO-10-45 Credit Card Interchange Fees
 

fees for rewards and corporate cards.20 Although these networks do not 

make their merchant discount rate information publicly available, a recent 

survey of 750 small business owners found that merchants with fewer than 

250 employees paid an average of 3.2 percent to accept American Express 

Cards and 2.5 percent for Discover cards, compared with the average 

merchant discount fee (which includes the interchange fee and acquiring 

costs) that these merchants reported of 2.3 percent for MasterCard and 

Visa.21 According to data provided to us by American Express, the average 

merchant discount rate for its cards has decreased in recent years, from 

roughly 3.25 percent in 1990 to 2.56 percent in 2009. 

The Structure of the Card 

Networks and Increased 

Competition for Issuers 

May Increase the Price of 

Card Acceptance for 

Merchants 

The structure of the credit card market is different from that of other 

markets and could be one reason why merchants’ costs for card 

acceptance are rising. Economists and other researchers note that credit 

card networks function differently from most markets because the card 

market can be considered a “two-sided” market, in which two different 

groups—merchants and consumers—pay prices for goods or services 

offered by a producer. Other two-sided markets include newspapers, 

which charge different prices to consumers who purchase the publications 

and advertisers that purchase space in the publications. Typically, 

newspapers offer low subscription rate or per copy price to attract 

readers, while funding most of their costs from revenue received from 

advertisers. Charging low prices to encourage larger numbers of 

consumers to purchase the newspaper increases the paper’s attractiveness 

to advertisers as a place to reach a large number of consumers, and thus 

allows publishers to charge such advertisers more. As a newspaper 

attracts more readers, it can charge higher prices to advertisers. 

Similarly, card networks use interchange fees as a way to balance demand 

from both consumers (who want to use cards to pay for goods) and 

merchants (who accept cards as payment for goods). As with newspapers, 

the costs to both sides of the card market are not borne equally. To attract 

a sufficient number of consumers to use their cards, card networks 

 

20Discover officials told us that after 2004, they were able to offer card-issuing agreements 

with other financial institutions. For transactions that occur on Discover cards issued by 

third-party issuers at merchants having acceptance arrangements with third-party 

acquirers, Discover receives interchange fees from the acquiring institution and also pays 

the card issuer an interchange fee. 

21NFIB Research Foundation, “Credit Cards,” National Small Business Poll 8, no. 3 (2008). 

Available at http://www.nfib.com/research-foundation/national-small-business-poll/. 

Page 18 GAO-10-45 Credit Card Interchange Fees
 

compete to attract financial institutions to issue them, and institutions in 

turn compete to find additional cardholders. Just as readers have a variety 

of sources from which they can receive their news, consumers also have a 

number of different methods (such as cash, check, or credit card) by 

which they can pay for a good or service. Because of the choices 

consumers have available, card networks and issuers want to minimize the 

costs for consumers to carry their cards to encourage greater acceptance 

and use. In contrast, merchants have less choice about card costs, 

particularly once a large number of consumers are using a particular 

network’s cards.22 Whereas a consumer may not pay any fee or charge for 

using a card, card networks charge merchants for accepting cards through 

interchange and other network fees. Consumers’ payment choices, such as 

using rewards cards with higher interchange fees, also affect merchants’ 

costs for card acceptance.23 As a result, some academic researchers have 

argued that card networks can keep attracting cardholders by offering 

them increasingly attractive terms while increasing costs to merchants, 

whose ability to refuse to accept cards is more limited. 

The concentration of participants in the credit card network market also 

has raised concerns over competition and pricing. Visa and MasterCard 

together accounted for about 71 percent of U.S. credit card purchase 

volume in 2008, American Express for about 24 percent, and Discover for 

5 percent, according to an industry newsletter.24 Some economists and 

other academic researchers have argued that the large market share of 

Visa and MasterCard provides these networks with market power—the 

ability to raise prices without suffering significant negative competitive 

effects such as lost sales or reduced transaction volume. As more 

consumers demand to use Visa and MasterCard cards, merchants feel 

limited in their ability to refuse these cards even as interchange fee rates 

rise or as consumers increasingly use rewards cards that have higher 

interchange rates. These researchers cite the low market share for 

 

22The more consumers use the network, the more attractive the network becomes to 

consumers, and the easier it becomes for the network to attract new customers to its cards. 

The increasing attractiveness of cards to consumers limits the ability of merchants to 

refuse that network’s card, an effect known in economic theory as a network, or adoption, 

externality. 

23Economists have also questioned whether consumers’ payment choices appropriately 

affect the social costs and benefits of various payment methods. However, they note that 

determining whether a payment type is over or underused is extremely difficult. See Prager 

and others. 

24See The Nilson Report, April 2009, Issue 924. 

Page 19 GAO-10-45 Credit Card Interchange Fees
 

Discover as evidence that a new product has had difficulty breaking into 

the mature market. With fewer cardholders, the attractiveness of this 

network’s cards to merchants is reduced. In order for Discover or another 

low-cost credit card network to enter the market, it has to compete against 

the dominance of Visa and MasterCard, which already have successfully 

recruited thousands of financial institutions to issue their cards and 

millions of merchants to accept them.25 Card networks face initial fixed 

costs, including building and maintaining the infrastructure to process 

transactions and promoting card usage. Many of the economists that study 

card market issues generally agree that card networks provide a valuable 

service that benefits issuers, consumers, and merchants. However, some 

have pointed out that once a network’s initial start-up and coordination 

costs have been recovered, the justification for charging merchants higher 

prices for card acceptance is reduced. 

Competition among networks for issuers also may increase merchants’ 

card acceptance costs, as networks increase interchange fees. Although 

greater competition generally produces lower prices for goods and 

services, some economists have noted that competition among card 

networks instead increases costs for merchants. To maintain or increase 

their market share, networks compete for financial institutions to issue 

their cards, and the revenues that the issuers earn from interchange fees 

are an incentive to choose to issue one network’s card over another. A 

recent court ruling increased the potential for competition among 

networks for issuers. Before 2001, Visa and MasterCard had exclusionary 

rules prohibiting their member institutions from issuing American Express 

or Discover cards. In 1998, DOJ initiated a lawsuit charging, among other 

things, that Visa and MasterCard had conspired to restrain trade by 

enacting and enforcing these exclusionary rules. The trial court held that 

Visa and MasterCard had violated section 1 of the Sherman Antitrust Act 

by enforcing their respective versions of the exclusionary rule.26 As a 

result of the court’s decision, an issuer of one of these network’s cards 

now has the option to issue cards on the Visa, MasterCard, American 

Express, or Discover network, or a combination of them. Network officials

from Visa told us that they actively compete to retain issuers on their 

network and interchange fees play a role in that effort. Our analysis of 

 

25Similarly, merchants also face challenges in starting their own card network or card, 

because a large portion of their customers already have Visa and MasterCard brand cards. 

26United States v. Visa U.S.A., Inc., 344 F.3d 229 (2d Cir. 2003), aff’g, 163 F. Supp. 2d. 322 

(S.D.N.Y. 2001) and cert. denied, 543 U.S. 811 (2004). 

Page 20 GAO-10-45 Credit Card Interchange Fees
 

interchange fee rate schedules showed that Visa and MasterCard 

introduced several of their highest interchange fee rates after this 

decision, which led to a significant increase in the average interchange fee 

rates for both networks. According to our analysis, 46 percent of the 

different Visa interchange rates that prevailed in 2009 had been introd

since 2003, and the average of the new interchange rates created by that 

network since 2003 was 18 percent higher than the average of interchang

rates introduced prior to 2003. Similarly, 89 percent of the different 

MasterCard interchange rates that prevailed in 2009 had been introdu

since 2003, and the average of the interchange rates created by that 

network since 2003 was 11 percent higher. According to analysis provide

by the Federal Reserve, Visa and MasterCard introduced higher 

interchange fee categories in 2005 for premium cards. Visa and 

MasterCard officials told us that Visa’s “signature preferred” and 

MasterCard’s “world card” interchange categories were limited

uced 

e 

ced 

d 

 only to 

higher-spending cardholders. 

d 

it, and 

ing 

ant 

erations, including the issuance 

of cards and credit card bill statements. 

e 

 

Issuers report that the revenue they receive from interchange fees is use

to cover a variety of costs in their card programs. Establishing a credit 

card program by soliciting customers, offering them unsecured cred

paying for any resulting credit or fraud losses involves many costs. 

Representatives from issuers and networks reported that interchange fees

represent a value to merchants, as issuers’ credit card programs provide 

merchants with increased sales and eliminate the need for merchants to

create and maintain their own credit card operations or internal credit 

departments.27 Among the costs that issuers told us they incur in running 

their credit card programs were costs related to preventing and address

fraud and data breaches; write-offs for credit losses from delinquent or 

defaulting cardholders; funding costs associated with paying the merch

before receiving payment from the cardholder; paying for rewards and 

other cardholder benefits; and general op

t Card Interchange Fees

Although issuers incur costs for offering cards, concerns remain about th

extent to which interchange fee levels closely relate to the level of card 

program expenses or whether they are set high so as to increase issuer 

profits. In a competitive market, the price of the product and the cost of 

 Have 

ant 

Interchange Fees 

Although Offering Cards

Involves Various Costs, 

Issuers Traditionally

Derived Signific

Revenues from 

27We discuss the benefits and costs of card acceptance to merchants in more detail later in 

this report. 

Page 21 GAO-10-45 Credi
 

producing it would be closely aligned. However, producers with market 

power—such as monopolists or those offering goods not generally 

by others—have the ability to charge high, noncompetitive prices. 

Representatives of issuers told us that interchange fees did not directly 

cover specific costs of establishing and maintaining a credit card program, 

but were one of several revenue sources for issuers, in addition to interest 

charges on outstanding balances and cardholder fees (such as a late fee or 

an annual fee). Representatives from a banking industry consultancy 

group told us that the allocation of issuers’ revenue varied widely, as s

issuers provide more benefits through greater rewards and othe

offering more credit. For example, issuers derive revenue from 

cardholders who pay interest charges and other fees on their outs

balances. However, issuers may receive little to no revenue from 

cardholders who pay off their balances on time. Representatives from 

large and small issuers told us that interchange fees provide them with 

income that covers the costs of providing short-term credit during the 

grace period and rewards bene

offered 

ome 

rs by 

tanding 

fits to those cardholders who do not pay 

interest charges or other fees. 

ated to 

endent 

s 

ed 

t 

f 

rds 

two 

ed the issuance and 

maintenance of a card program to a third party. 

Representatives of credit unions and community banks reported that 

revenue from interchange fees allowed them to cover expenses rel

offering credit cards and compete with large issuers to offer their 

customers credit cards. According to data provided by the Indep

Community Bankers of America, the interchange fee portion of 

community banks’ credit card revenue varies widely, with some receiving

little income from interchange fees because of inactive cards and others 

receiving nearly all of their income from interchange fees. Staff from thi

organization told us that they have contracted with a vendor processor 

that provides card processing for many of their members. They report

that of the 689 community banks that issue credit cards through this 

vendor, the average amount of revenue from interchange fees represented

about 43 percent of these institutions’ total card revenues. Credit unions

and community banks had a higher portion of cardholders who did no

carry a balance or incur penalty fees, according to representatives of 

financial institutions, so they had to rely more on interchange fee revenues

than revenues from fee income and interest payments. Representatives o

the smaller issuers also reported that they felt they had to offer rewa

programs to compete with the larger issuers, but for some, rewards 

programs did not constitute a majority of their expenses. In addition, 

of the credit unions with which we met outsourc

Page 22 GAO-10-45 Credit Card Interchange Fees
 

Information on the amount of revenues larger financial institutions coll

from interchange fees and how those revenues compare with their costs o

card operations and rewards programs is limited. We were not able to 

obtain data from the largest card issuers about their revenues, profits, or 

expenses to compare interchange fee revenues with expenses. Howe

industry sources indicate that credit card issuers have derived a signific

amount of revenue from interchange fees. According to an industry 

newsletter, in 2007, roughly 20 percent of Visa and MasterCard issu

card-related revenue—roughly $24 billion—came from interchange fees, 

while their total costs (for costs of funds, charge-offs, operations, 

marketing, and fraud) were about $90 billion, and their profits afte

$18.3 billion.

ect 

f 

ver, 

ant 

ers’ 

r taxes 

3 to 

in 

.

29 However, officials from one 

banking regulator cautioned that they were still reviewing the consistency 

 

28 According to an economist working for the largest issuers, 

issuers pass on increased revenue from interchange fees to their 

cardholders in the form of greater rewards. He reported that from 200

2008 one large credit card issuer provided an increasing portion of its 

interchange fee income as rewards to its cardholders and that Visa’s 

traditional rewards, premium rewards, and superpremium interchange fee 

categories had minimum cardholder rewards programs associated with 

them. Beginning in March 2008, national and state-chartered banks had to 

submit data on revenues from credit and debit card interchange fees 

quarterly reports on their condition and income (Call Reports) when such 

amounts exceeded certain thresholds

of the data provided on these forms. 

Large issuers of credit cards traditionally have been among the most 

profitable banking institutions. Although credit card issuers have suffered 

losses in the recent economic downturn, a June 2009 Federal Reserve

28The Card Industry Directory, 2007 data. These data do not break out rewards as a 

separate cost. In addition, we were not able to verify these data with issuers. An economist 

from the Federal Reserve Bank of Kansas City and representatives of merchant groups 

have cited work by Diamond Consulting that broke down interchange fee expenses. This 

report estimated that of the components of interchange revenue, 44 percent went to issuer 

rewards and only 13 percent went to network and issuer processing. Since these data have 

been published, Diamond Consulting has issued a statement cautioning that these data 

were based on the author’s views and not on data that issuers provided. 

29The Federal Financial Institutions Examinations Council, the interagency body that 

prescribes uniform principles, standards, and report forms for the federal examination of 

financial institutions by the federal banking regulators and the state liaison committee, 

governs the collection of the Call Report data, but these requirements are only for banks 

overseen by the Office of the Comptroller of the Currency, the Federal Reserve, and the 

Federal Deposit Insurance Corporation. 

Page 23 GAO-10-45 Credit Card Interchange Fees
 

report points out that for large credit card banks, credit card earnings have

been consistently higher than returns for all other commercial bank 

activities, as shown in figure 4. t 

lending have lost some of their profitability in the economic downturn as 32

30 Recent analysis by FDIC also shows tha

credit card lending remains a profitable business for credit card issuers, 

and an FDIC official recently testified that credit card lending has been 

one of the most profitable business lines for some time.31 However, FDIC 

data also show that federally insured institutions that focus on credit card

shows tha

credit card lending remains a profitable business for credit card issuers, 

and an FDIC official recently testified that credit card lending has been 

one of the most profitable business lines for some time.31 However, FDIC 

data also show that federally insured institutions that focus on credit card

these institutions experienced some of the highest rates of charge-offs.

Figure 4. Return on Assets, Larg Figure 4. Return on Assets, Large U.S. Credit Card Banks, 19 e U.S. Credit Card Banks, 1986-2008 and All FDIC-Insured and All FDIC-Insured Commercial Banks, 19 Commercial Banks, 1988-2008

Percentage

Year

Sources: Federal Reserve analysis from Banks' Reports of Condition and Income, 1986-2008, Report to Congress on the 

Profitability of Credit Card Operations of Depository Institutions; GAO analysis of FDIC Quarterly Banking Profile Data, 1988-2008.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Large U.S. credit card banks

All FDIC-insured commercial banks

Note: Federal Reserve defines credit card banks as the bulk of their assets are individual loans and 

90 percent or more of their consumer lending involves credit cards or related plans. 

 

30Board of Governors of the Federal Reserve System, “Report to the Congress on the 

Profitability of Credit Card Operations of Depository Institutions” (Washington, D.C.: June 

2009). 

31Statement of Martin J. Gruenberg, Vice Chairman, Federal Deposit Insurance 

Corporation. “Credit Cardholders’ Bill of Rights: Providing New Protections for 

Consumers” before the Subcommittee on Financial Institutions and Consumer Credit of the 

Financial Services Committee, U.S. House of Representatives. 110th Cong., 2nd sess. 2008. 

32FDIC Quarterly Banking Profile, second quarter 2009. 

Page 24 GAO-10-45 Credit Card Interchange Fees
 

Some consumers have benefited from competition in the credit card 

market, as those using credit cards enjoy lower fees and interest rates and 

greater rewards. Benefits to cardholders vary depending on how they use 

their cards; those with credit card debt accrue finance charges and may 

pay additional fees. 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. 

While Competition 

among Issuers Has 

Increased Benefits 

and Lowered Costs 

for Some 

Cardholders, Other 

Consumers May Be 

Negatively Affected 

by Increased Card 

Use 

Cardholders Benefit from 

Rewards as Credit Card 

Issuers Compete for Their 

Business 

Although most cards in the United States are issued by the largest issuers, 

consumers have a wide variety of issuers and cards to choose from. 

According to the Federal Reserve, over 6,000 depository institutions issue 

credit cards. These issuers range from some of the very largest financial 

institutions—such as Bank of America and Citigroup—to credit unions 

and community banks that range in size and can be small. While there are 

estimated to be thousands of credit unions and community banks that 

issue cards, the 10 largest issuers account for about 92 percent of all 

outstanding credit card debt. 

Given the large number of issuers and widespread use of credit cards by 

consumers, issuers compete to obtain new customers and retain existing 

ones. According to the Survey of Consumer Finances, in 2007, 73 percent 

of U.S. families had a least one credit card. Issuers typically use mail 

solicitations to market their card products—mailing 3.8 billion 

solicitations in 2008—but representatives from one large issuer we spoke 

with told us that they can also advertise online and at their branch 

locations.33 Issuers target their marketing efforts depending on 

cardholders’ payment and use patterns. Cardholders paying their balance 

 

33The number of mailings in 2008 represents a sharp decline from the 5.2 billion mailings in 

2007 and likely reflects the effects of a weaker economy, rising unemployment, and 

increased credit risk among current and prospective card holders. The decline in activity 

may also reflect the effects of funding issues (as problems in the market for credit cardbacked securitizations emerged in 2008 and may have reduced the ability of card issuers to 

fund their outstanding credit card liabilities at attractive rates.) 

Page 25 GAO-10-45 Credit Card Interchange Fees
 

in full each month (convenience users) and high-volume card users may be 

drawn to cards that offer rewards programs, while those cardholders 

carrying a balance may be more likely to choose a card that offers a low 

interest rate. 

As competition for cardholders has intensified, issuers increasingly have 

turned to rewards programs to attract and retain cardholders. As 

discussed earlier, these programs are funded in part by interchange fee 

revenues. According to an industry study, 71 percent of cardholders held a 

rewards card in 2008.34 Representatives of all of the large issuers with 

whom we spoke told us rewards cards represent a significant portion of 

the cards they offer and are designed with incentives to increase their use 

by cardholders. One issuer’s staff told us that all of their bank’s traditional 

credit cards that are in active status have a rewards component and they 

believe that rewards programs help them to build customer loyalty and to 

retain existing cardholders. A representative of another large issuer stated 

that about 51 percent of its cardholders have rewards cards, representing 

about 81 percent of total volume for the issuer, and a representative of 

another issuer reported that approximately 50 percent of its cards earn 

points that can be redeemed for rewards or other benefits. Visa and 

MasterCard also now allow issuing institutions to upgrade cardholders 

with basic cards to those with rewards without reissuing the card. 

Competition among issuers also can lower many cardholders’ credit card 

costs. For example, issuers compete with one another by offering cards 

with low interest rates. Representatives from one of the large issuers with 

whom we spoke stated that they typically offer these types of benefits to 

appeal to cardholders. For example, many issuers offer low temporary 

rates to transfer existing card balances to a new account. In 2006, we 

reported that many issuers attempted to obtain new cardholders by 

offering low, even zero, introductory interest rates for limited periods.35

 

34Diners Club introduced a rewards program that offered airline miles to its customers in 

1984. Over time, an increasing variety of rewards have been offered to cardholders, 

including cash-back bonuses based on purchase volume and rewards point donations to 

charities, alumni associations, and environmental groups. Some issuers also began offering 

co-branded cards—with the merchant’s and the network’s name on the card—that provide 

discounts at the merchant with whom the issuer has established the co-branded 

relationship. Currently, cash-back bonuses of 3 to 5 percent are common on purchases at 

certain types of retailers. 

35GAO, Credit Cards: Increased Complexity in Rates and Fees Heightens Need for More 

Effective Disclosures to Consumers, GAO-06-929 (Washington, D.C.: Sept. 12, 2006), 16. 

Page 26 GAO-10-45 Credit Card Interchange Fees
 

According to an issuer representative and industry analyst we interviewed 

at that time, low introductory interest rates were necessary to attract 

cardholders in a competitive environment in which most consumers who 

qualify for a credit card already have at least one. In addition to offering 

low interest rates, issuers compete by offering cards that have no annual 

fees and low fees for other actions associated with usage. These lower 

rates and fees can decrease the cost of using credit cards for some 

cardholders. 

However, in recent months, changes in the economy and the passage of 

the CARD Act have led many issuers to “reprice” their credit card accounts 

by altering the rates, fees, and other terms that apply to cardholders’ 

cards. For example, increasing numbers of consumers have been falling 

behind on their credit card payments. In the first quarter of 2009, the 30-

day credit card delinquency rate reached its highest rate—6.6 percent—in 

18 years. Provisions in the CARD Act—most of which will take effect in 

February 2010—limit the ability of card issuers to increase the interest 

rates, fees, or finance charges on outstanding balances to the conditions 

set forth in the act.36 According to an industry publication, in anticipation 

of the law taking effect, some issuers have increased the interest rates 

they charge on consumer purchases as well as some of the fees associated 

with card usage, such as balance transfer fees. According to Federal 

Reserve data, interest rates on consumer credit card accounts have been 

increasing steadily each quarter since the second quarter of 2008, when 

rates were 11.88 percent.37 Since that time, rates have increased to 13.32 

percent in the second quarter of 2009.38

Increased Use of Credit 

Cards May Not Benefit All 

Consumers 

Increased merchant costs for card transactions may lead to higher prices 

for noncardholding consumers. As discussed earlier, merchants have 

faced increased costs from accepting credit cards in recent years, in part 

because of the increasing number of customers using credit cards and in 

 

36See §101 (b) of the CARD Act, to be codified at 15 U.S.C. § 1661i-1.

37G.19 Federal Reserve Statistical Release. Consumer Credit, August 2009. (Washington, 

D.C.: October 7, 2009). 

38Cardholders also can incur numerous costs associated with using their cards. Depending 

on how consumers use their cards, they may be assessed a variety of fees. For example, 

cardholders who make late payments may be charged a late payment fee. Or if a cardholder 

chooses to obtain a cash advance on the card, he or she may be assessed a fee for the 

advance. See GAO-06-929. 

Page 27 GAO-10-45 Credit Card Interchange Fees
 

part because of the increase in average interchange fees, particularly from 

higher-fee rewards cards. Representatives of merchants we interviewed 

told us that they generally passed any increased costs—including the costs 

of accepting credit cards—on to their consumers through higher retail 

prices. Thus, all their customers may be paying higher prices for goods 

and services, whether using a credit card or not. 

Economists disagree whether the increased use of rewards cards further 

increases costs for merchants. Some researchers state that the increased 

use of rewards cards, which have higher interchange fees, increase costs 

for merchants, as their customers switch from paying with cash, check, 

and basic credit cards to using rewards cards. As a result all customers, 

including cash and check users, may pay higher prices for goods and 

services. In addition, some economists have stated that because rewards 

cardholders do not pay for rewards cards directly, they use their rewards 

cards more for transactions than if their cards included explicit costs. For 

example, one study in which consumer survey data were used found that 

cardholders with rewards cards were more likely to use their cards 

exclusively than cardholders without rewards cards.39

However, the extent to which merchants increase retail prices to account 

for the costs associated with accepting cards is difficult to measure. Some 

researchers argue that consumers—even those paying cash or by check—

may still be better off because of widespread card use. While merchants 

may pay more out of pocket to accept credit cards than they do for other 

forms of payment, credit cards also provide significant benefits to 

merchants, such as lower labor and processing costs and increased sales. 

For example, one of these researchers has theorized that the benefits of 

increased credit card use may lower merchants’ costs, which in turn 

would allow them to sell their goods and services more cheaply.40

 

39Andrew Ching and Fumiko Hayashi. “Payment Card Rewards Programs and Consumer 

Payment Choice.” (Federal Reserve Bank of Kansas City, Working Paper, May 13, 2008). 

40Steven Semeraro. “The Reverse-Robin-Hood-Cross-Subsidy Hypothesis: Do Credit Card 

Systems Effectively Tax the Poor and Reward the Rich?” (Working Paper, San Diego, Calif., 

2008). 

Page 28 GAO-10-45 Credit Card Interchange Fees
 

Merchants can receive a wide range of benefits from accepting credit 

cards, and some merchants we interviewed reported receiving increased 

sales from credit cards. 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. 

Although Accepting 

Credit Cards Provides 

Benefits, Merchants 

Report Card Costs 

Are Increasing Faster 

and Their Ability to 

Negotiate or Lower 

These Costs Is 

Limited 

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. Increased sales can occur for several 

reasons. First, a customer without sufficient cash can make a purchase 

immediately using a credit card, resulting in a sale that the merchant 

otherwise would not have made. In addition, some research has shown 

that, when not paying with cash, some customers may purchase more than 

they would have otherwise.41 These researchers say the additional 

spending occurs because paying with a card can feel less like true 

spending to some consumers than paying with cash. Representatives of 

card networks and issuers also report that consumers with rewards cards 

spend more because they factor in the price of the rewards they receive 

from their issuing institution, which also results in greater sales than the 

merchants would otherwise have made. One researcher noted that the 

amount of additional sales merchants receive from accepting credit cards 

can be greater for certain businesses. Customers more commonly use 

credit cards for large purchases and for purchases that they might not be 

able to pay off right away. Several of the merchants we interviewed have 

seen some evidence that accepting credit cards has increased their sales. 

For example, representatives from a national discount store and a small 

home improvement store told us that customers paying with credit cards 

spent more than customers paying with cash or debit cards. A dentist told 

 

41See, for example, Tom Brown and Lacey Plache. “Paying with Plastic: Maybe Not So 

Crazy.” University of Chicago Law Review, 73 (Winter 2006): 63-86 

Page 29 GAO-10-45 Credit Card Interchange Fees
 

us that his patients spent more on procedures because of the credit that 

their cards provided. 

Representatives of the card networks also told us that they also are able to 

increase merchant sales by providing merchants with customer 

information to enhance their marketing efforts. For example, 

representatives from one card network told us that they have specific staff 

tasked with organizing marketing campaigns targeted to particular 

merchants to increase the sales these merchants make from this network’s 

cardholders. For example, if cardholders purchased particular items, their 

next billing statement would include offers for additional discounts on 

future purchases at specific merchants that accept their card that also sell 

such items. The networks reported that through their respective 

databases, they help merchants identify and better understand their 

prospective, current, and lapsed customers and employ a variety of niche 

marketing approaches that ultimately serve to increase sales. 

Accepting credit cards also allows merchants to make sales on credit at a 

generally lower cost than operating their own credit program. As noted 

previously, individual merchants originally offered credit cards that could 

be used only at their stores, but many such merchant programs have been 

discontinued now that cards issued by third parties—banks, credit unions, 

and thrifts—are available. Card network and issuer staff told us that credit 

cards allow merchants to obtain sales from customers that want to finance 

their purchases over time without the merchants having to incur the costs 

involved with offering credit. For example, they said merchants avoid the 

costs of credit losses, debt collection, credit quality assessment, card 

production, and statement preparation. 

Credit card acceptance benefits merchants in other ways. For example, 

merchants can receive faster and more certain payment from customers 

using cards than from customers using other means, such as checks. 

Receiving the funds from a check can take as long as 5 days, but 

merchants can receive the proceeds from card payments from their 

acquiring institution in 1 or 2 calendar days.42 For example, the dentist we 

interviewed told us that his credit card payments are credited to his bank 

account the day they are processed, providing him almost immediate 

 

42Even though the legal maximum generally is 5 days, banks make funds available from the 

majority of consumer check deposits within 1 business day, according to the Federal 

Reserve. Federal Reserve staff noted that this maximum will change in early 2010. 

Page 30 GAO-10-45 Credit Card Interchange Fees
 

access to the funds. A small flower shop owner told us that she receives 

faster payments by credit card than from customers to whom she extends 

credit by sending a bill. Several of the merchant and banking organizations 

we interviewed also cited the certainty of credit card payments as a 

benefit to merchants. For example, the home improvement merchant 

noted that she preferred being paid by credit card to receiving bad checks. 

Similarly, a sports club owner reported that he prefers the guaranteed 

payment associated with accepting credit cards to the risks associated 

with accepting checks. Staff of an association that represents credit 

unions noted merchants that accept cards have less cash to handle and 

less risk of employee theft. Staff from a banking association noted that 

card acceptance reduces the need for merchants to make physical 

deposits, since card payments are settled directly with their financial 

institution. Economists have also documented the benefits of guaranteed 

payments to merchants.43

Card acceptance also can reduce the time merchants’ customers spend at 

checkout and can reduce labor costs. For example, representatives of one 

large merchant told us that their analyses indicated that processing a 

check payment takes them an average of 70 seconds, processing a cash 

payment averages 51 seconds, and a credit card payment 32 seconds. Staff 

from card networks and card issuers told us that the efficiency of card 

payments has allowed merchants to reduce their staffing, thus saving on 

labor costs. For example, they noted that credit card customers at gas 

stations and other retail stores often can pay for purchases without 

necessarily interacting with an employee. 

Despite the benefits of payment card acceptance, representatives of 

several of the large merchants we interviewed reported that their costs of 

card acceptance have increased disproportionately in comparison with 

benefits, in large part because of increasing card use. Several of the large 

merchants we interviewed reported that as a percentage of sales, payment 

cards are more expensive to process than cash and checks, a fact they 

explained reflects the technological advances in check processing as well 

as a competitive market for check-processing services. They also reported 

that even allowing for the operational and administrative costs associated 

with processing cash (such as armored cars and losses by theft), credit 

Large Merchants Report Rising 

Use of Rewards Cards Leads to 

Costs That Are Not 

Commensurate with Benefits 

 

43See, for example, Daniel D. Garcia-Swartz, Robert W. Hahn, and Anne Layne-Farrar. “The 

Move toward a Cashless Society: A Closer Look at Payment Instrument Economics,” 

Review of Network Economics, 5 (2) June 2006. 

Page 31 GAO-10-45 Credit Card Interchange Fees
 

card interchange fees result in credit card payments being more expensive 

for them overall. For example, staff from one large retail chain told us that 

for a $100 transaction, a credit card payment generally cost the company 

about 14 times as much to accept as cash. Other merchants reported that 

transaction costs for credit cards were two to four times more than their 

transaction costs for cash. Representatives from large national merchants 

also provided us with data showing that sales made with cash and checks 

have decreased in recent years, while sales made with credit cards—

particularly those using high-interchange fee cards—have increased. 

Although credit cards are supposed to generate increased sales for 

merchants in exchange for their acceptance costs, representatives of large 

merchants we interviewed told us that their card acceptance costs had 

increased faster than their sales. For example, a large home improvement 

retailer told us that although cards may have increased its sales in the past, 

this has not been occurring recently. According to its own analysis, the 

total cost the company has paid to accept MasterCard, Visa, American 

Express, and Discover cards combined increased by 16 percent from 2002 

through 2008; however, sales for those same cards increased by only 10 

percent during this period. Representatives of this merchant also told us 

that they had calculated that for every additional 1 percent their company 

has paid in card acceptance fees and costs, it has received 0.63 percent in 

additional sales. An official representing a large convenience store chain 

said that although he believes that a decade ago people may have spent 

more with credit cards than with cash or check because of the availability 

of credit, he no longer thinks that is true. 

Several of the large merchants that we interviewed attributed their rising 

card acceptance costs to customers’ increased use of rewards cards. Staff 

from these merchants all expressed concerns that the increasing use of 

rewards cards was increasing merchants’ costs without providing 

commensurate benefits. For example, one large merchant provided us 

with data on its overall sales and its card acceptance costs. Our analysis of 

these data indicated that from 2005 to June 2009, this merchant’s sales had 

increased 23 percent, but its card acceptance costs rose 31 percent. 

Rewards cards were presented as payment for less than 1 percent of its 

total sales volume in 2005 but accounted for almost 28 percent of its sales 

volume by June 2009. During this same period, sales processed on 

nonrewards cards fell by 43 percent. Several of the other large merchants 

we interviewed provided data that showed that the proportion of rewards 

cards presented as payment by their customers also had risen significantly 

in recent years. For example, representatives from one merchant said 

about 70 percent of payments on one network’s cards transferred to 

Page 32 GAO-10-45 Credit Card Interchange Fees
 

rewards cards over the past 5 years, representing an increase in rewards 

cards use of 385 percent since rewards cards were introduced. 

Further, several of the large merchants also told us that they do not always 

see correspondingly increased sales from rewards cards compared with 

other cards. For example, one large merchant provided us with data on its 

average purchase (ticket) size by payment means. According to our 

analysis of these data, in July 2005 the average ticket size for rewards 

cards transactions was around $203, but the average ticket size for 

nonrewards transactions was about $184—the average rewards card 

purchase exceeded a nonrewards purchase by $19, or about 10 percent, 

that month. However, during the 47 months from July 2005 through May 

2009 for which data were available, the average ticket size for Visa 

rewards cards was lower than for nonrewards Visa transactions in 9 

months—or about 19 percent of the time. 

Although representatives from the card networks and issuers provided us 

with data indicating that rewards cardholders spent more than 

nonrewards cardholders, their analysis did not demonstrate that rewards 

cardholders spent more than they would have with other tender types, 

producing increased sales for merchants. The largest networks and issuers 

we interviewed provided data showing the total amount of spending by 

their rewards cardholders exceeded that of their nonrewards cardholders. 

One card network provided us with data that showed that according to its 

analyses, its three levels of rewards cards had higher average ticket 

amounts than its basic cards by over $4, almost $12, and over $26 for the 

highest level of rewards. However, other factors suggest that attributing 

increased sales to card use for merchants is difficult. For example, 

rewards cards generally have been offered to higher-income cardholders. 

Such cardholders might spend more than the average cardholder 

generally. Thus higher total spending on rewards cards by individual 

cardholders or increased ticket sizes for such cards may reflect only that 

those cardholders spend more in general, and not represent additional 

sales that a merchant otherwise would not have received. Similarly, higher 

total spending on rewards cards compared with spending on nonrewards 

cards could reflect that rewards cardholders tend to consolidate their 

spending on fewer cards—sometimes onto a single card—in order to 

maximize their ability to earn rewards. As a result, such cardholders may 

not be spending more overall but just limiting their payment methods. 

Furthermore, merchants may initiate other programs to increase sales. For 

example, representatives from a large national retailer told us that when 

the company started accepting credit cards, sales did increase, but they 

attributed this increase to the simultaneous introduction of promotions for 

Page 33 GAO-10-45 Credit Card Interchange Fees
 

their new products, and they did not feel that credit card acceptance 

added any proven incremental sales volume. This spending also may not 

represent additional sales to merchants. For example, some merchant 

officials and others told us that cardholders can buy only so much gas; 

they questioned whether cards actually increased gas station sales overall. 

Similarly, payments for certain other goods or services, such as taxes or 

business permits, are not likely to result in increased sales. 

In addition, some of the large retailers and merchant trade associations 

told us that one of the reported benefits of credit card acceptance—

guaranteed payment—was not always provided to merchants. These 

representatives also noted that merchants received significant amounts of 

chargebacks—in which the card issuer subtracted amounts previously 

credited to the merchant. Such chargebacks can occur either because of 

fraud or when the customer alleges that the goods were not as described 

or were never received. However, some of the merchants noted that 

researching such instances to have the charged amount reinstated is a 

labor-intensive process. As a result, some told us they had established 

minimum amounts under which they would not attempt to research and 

justify a charge. According to data provided by one large issuer, 

chargebacks as a percentage of sales on one network’s cards ranged from 

0.1 percent to 0.2 percent from December 2006 through June 2009.44

Merchants also reported bearing costs for fraud detection and 

prevention—another reported benefit of credit card acceptance. For 

example, the increased prevalence of computer hacking incidents in which 

criminals obtained unauthorized access to cardholder data prompted the 

card industry to develop the Payment Card Industry Data Security 

Standard.45 According to merchants, the card networks have also 

mandated compliance with these standards, and merchants that fail to 

meet them are subject to higher interchange fees and fines of $25,000 or 

more. Although merchant officials acknowledged that such standards are 

necessary, they noted that they have had to incur significant expenses to 

comply with them. For example, representatives from one large merchant 

 

44According to the issuer, these data reflect chargebacks that were accepted by the 

network, but not those that were rejected or adjudicated. 

45These requirements include installing and maintaining systems to protect cardholder data; 

not using vendor-supplied defaults for system passwords and other security parameters; 

protecting stored cardholder data; and encrypting transmission of cardholder data across 

open, public networks. 

Page 34 GAO-10-45 Credit Card Interchange Fees
 

told us their company spent around $20 million initially to become 

compliant with these data security standards and has had to spend about 

$4 million annually to maintain that certification. Officials from another 

large retailer said their company also has spent millions of dollars 

becoming compliant with these standards. However, they said that their 

company has advocated increased data security for years, but noted that 

instead of just increasing costs for merchants to secure card information, 

the card networks should be developing payment types that are more 

secure. For example, several merchants we interviewed noted that other 

countries are moving away from cards that store sensitive data on 

magnetic stripes on the cards, which can be duplicated by criminals to 

create counterfeit cards, and instead are implementing cards that require 

the user to enter a PIN, which merchant representatives told us is more 

secure. 

The small merchants we interviewed generally had mixed views about 

interchange fees and the overall cost of card acceptance. Some merchants, 

such as the owners of a private golf course and a flower shop, 

respectively, chose not to spend as much time examining their payment 

costs because the costs had remained either relatively constant or had not 

risen significantly in recent years. Finally, a few merchants noted they 

considered these fees as simply part of the cost of doing business. 

Although Able to Negotiate 

to Lower Some of Their 

Card-Processing Costs, 

Merchants Reported 

Limited Ability to 

Negotiate Lower 

Interchange Fees 

Increased competition for acquiring services provides merchants with 

considerable choice and opportunities to negotiate and lower some of 

their card acceptance costs. As noted previously, the merchant discount 

fee that merchants pay to acquiring institutions has two components: the 

interchange fee—which represents the bulk of the total discount fee—and 

the processing costs. Hundreds of financial institutions and other firms 

compete as acquirers to provide card-processing services. Staff from 

merchants, issuers, and card networks told us that the acquiring market is 

competitive. According to a 2007 report published by the Federal Reserve 

Bank of Philadelphia, approximately 1.4 million merchants change 

acquiring institutions each year.46 This report stated that this is the result 

of the merchants seeking lower prices for acquiring services and better 

services. According to acquirers and merchants we interviewed, acquirers 

provide customized acquiring services based on processing volume. 

 

46Ann Kjos, “The Merchant-Acquiring Side of the Payment Card Industry: Structure, 

Operations, and Challenges,” Federal Reserve Bank of Philadelphia (October 2007). 

Page 35 GAO-10-45 Credit Card Interchange Fees
 

Acquirers attract new merchant clients by pricing their services 

competitively and offering a variety of services to meet merchants’ needs. 

The competition among acquirers gives merchants the opportunity to 

choose among competing acquirers and negotiate lower costs. Merchants 

of varying sizes that we interviewed reported that they have multiple 

acquiring institutions and processors competing for their business and 

have been able to successfully decrease the acquiring fee portion of their 

merchant discount fees in recent years. For example, several large 

merchants told us they periodically issue requests for proposal soliciting 

bids for acquiring services and receive several responses. However, some 

of the largest merchants told us their choice of firms that can provide 

them with adequate cost-processing services is generally limited to only 

some of the largest providers of acquiring services. 

Merchants Reported Acquirers 

Competed for Their Business 

and Ability to Decrease 

Acquiring Fees 

Small merchants may choose among numerous firms for processing 

services, including their own financial institutions. Eight of the nine small 

merchants we interviewed reported getting solicitations—some 

frequently—for their acquiring business or have shopped their acquiring 

business. Several of the small merchants with which we spoke used thirdparty processors for electronic payments. Merchants formed these 

business relationships with acquirers and processors through their own 

research, through agreements with their financial institutions, and through 

direct solicitations. Also, small merchants can find competitive providers 

on the Internet; for example, a warehouse store partners with a third-party 

processor to provide this service to small merchants. 

Although merchants have reported success in negotiating their acquiring 

costs, several of the merchants we interviewed told us that their ability to 

lower their interchange fee costs was limited. These merchants told us 

they generally paid the rates listed in the Visa and MasterCard networks’ 

default interchange fee schedules. Although the ability to refuse to accept 

Visa and MasterCard should provide merchants with the leverage to 

negotiate lower interchange fees, merchants reported that they could not 

refuse to take such cards because of customer demand. For example, 

several merchants told us that if they did not accept credit cards from Visa 

or MasterCard, their sales would decrease and they would lose business to 

competitors that did accept those cards. 

Merchants Report Limited 

Ability to Negotiate with 

Networks to Lower Majority of 

Card Acceptance Costs 

Merchants told us that without the ability to refuse to take the two largest 

networks’ cards, their attempts to negotiate lower fees for these networks’ 

cards generally have not been successful in obtaining meaningful 

reductions in their interchange fees. According to staff from Visa and 

Page 36 GAO-10-45 Credit Card Interchange Fees
 

MasterCard, their networks are willing to negotiate with merchants. For 

example, officials from one network told us that their network has 

negotiated with merchants with sales that represent 26 percent of its 

overall processing volume. Only one of the large merchants we 

interviewed told us that the company had received a limited and 

temporary reduction in its interchange fee costs as a result of negotiations 

with Visa or MasterCard following the settlement of a lawsuit.47 Two of the 

merchants we interviewed told us that they could receive reductions in 

interchange fee rates on one network’s card if they did not accept another 

network’s card. Other merchants told us that such negotiations were 

difficult for their businesses, because they had limited control over which 

type of credit card a customer would choose to use for a purchase. 

Merchants we interviewed told us that other opportunities that Visa, 

MasterCard, and their issuers offered to merchants to reduce interchange 

fees generally have had limited success. For instance, merchants can 

create a co-branded card. In exchange for promoting the co-branded card, 

the merchant could receive compensation from the issuer or network or 

reduced interchange fees. However, merchants we interviewed told us that 

they have had limited success with co-branding because they had difficulty 

encouraging their own customers to switch to these cards. For example, 

representatives from several grocery store chains said that they have had 

difficulty getting customers with six to eight credit cards in their wallet to 

add an additional one for sales in their stores. They said that they would 

have to offer customers rewards to compete for purchase volume with the 

other cards. In addition, an owner of a convenience store chain started 

offering a co-branded card in 2002. He said that his stores issued a total of 

2,500 cards in 7 years although the issuing financial institution anticipated 

that the convenience store would issue 10,000 cards annually; he told us 

that the rebates these cards offered—a 2-percent rebate at their stores, 1 

percent on purchases elsewhere—were not competitive to his customers. 

Similarly, officials from a large national retailer told us that less than 1 

percent of their sales were on their co-branded card. Smaller merchants 

we interviewed generally did not have relationships with issuers and 

networks. Representatives of issuers told us that the fact that merchants 

chose to enter into co-branded relationships was evidence that merchants 

receive greater sales and value from these programs. 

 

47Determining the extent to which merchants are able to negotiate over interchange fees is 

difficult, as at least one merchant we interviewed did not provide us with details of the 

company’s negotiations with the major card networks, citing contract provisions. 

Page 37 GAO-10-45 Credit Card Interchange Fees
 

In contrast to Visa and MasterCard, American Express and Discover 

generally act as their own acquirers and negotiate directly with the 

merchants accepting their cards. For example, representatives from 

American Express told us they negotiate a merchant discount rate directly 

with merchants for 1 to 5 year terms. While technically each merchant has 

a separate contract and rate, American Express officials noted that for 

many types of merchants, a standardized rate applies depending on 

transaction volume, with higher-volume merchants likely to pay less. The 

Discover card network conducts direct negotiations with large merchants 

and sets the merchant discount rates based upon these negotiations rather 

than publishing a schedule. Both the networks also use third-party 

acquirers that negotiate with the smaller merchants on behalf of their 

networks. As discussed previously, these networks have a lower market 

share than Visa and MasterCard, so merchants have greater ability to 

refuse to take such cards and a greater ability to negotiate costs and terms. 

Representatives of two of the grocery store owners we interviewed said 

that they had greater success in negotiating with American Express and 

Discover because these networks had lower market share and were trying 

to gain wider acceptance. 

Another factor that limits the leverage that merchants have to negotiate 

lower interchange fees are the card network rules. Each of the major card 

networks—Visa, MasterCard, American Express, and Discover—has 

various card acceptance rules that limit the options that merchants have 

for accepting or denying cards.48 These rules include the following: 

Merchants View Network Rules 

as Further Limiting Their 

Ability to Negotiate Payment 

Costs 

• No surcharges: Merchants may not impose a surcharge on consumers for 

the use of credit cards or cards with higher interchange fees. 

• Honor all cards: Merchants are required to accept all credit cards within a 

network’s brand. 

• No discrimination/differentiation: Merchants may not differentiate 

between cards within a network or discourage the use of cards within a 

network. 

 

48Not all of the networks have each of these rules, but if a merchant accepts cards from 

each of these networks, the merchant is subject to all of them. Visa, MasterCard, and 

American Express have posted some of their rules on their Web sites; Discover’s rules are 

not available online. 

Page 38 GAO-10-45 Credit Card Interchange Fees
 

• No minimum or maximum charges: Merchants may not impose a price 

floor or price ceiling on credit card transactions. 

• Preferred treatment: Merchants may not direct consumers away from or to 

a certain network’s cards. 

Merchants, some academic researchers, and merchant representatives 

argue that these rules constrain merchants’ ability to limit the costs of 

credit card acceptance. For example, without the ability to surcharge for 

credit cards generally, for a particular network’s cards, or for higher 

interchange fee cards, merchants are unable to steer customers toward 

lower-cost forms of payment or recoup some of their costs for higher-cost 

cards. In addition, without the ability to influence customers’ payment 

choices, merchants are unable to use their influence with the networks to 

encourage them to lower interchange and other fees in general, or offer 

more lower-fee cards. Merchants also told us that the rule requiring them 

to accept all cards from a network means that they are forced to accept 

higher-cost cards. Some of the merchants with which we spoke told us 

that the inability to set minimum credit card purchase amounts meant that 

they sometimes incurred card-processing costs that made some sales 

uneconomical. For example, one merchant told us that when a customer 

pays for a small item, such as a newspaper or a pack of gum, with a 

rewards card, the costs to process the transaction could exceed profit on 

the item. The rules provide cardholders with the ability to use any card at 

any accepting merchant. However, cardholders may not realize that 

different cards can affect merchant costs to different degrees because 

merchants cannot take actions that either limit cardholders’ ability to use 

certain cards or otherwise differentiate among cards. 

Representatives of issuers and card networks told us that the network 

rules are designed to promote the wide acceptance of their cards and 

ensure that their cardholders have a positive experience with the card. For 

example, they told us that the “honor all cards” rule ensures that 

merchants will accept all cards from a particular network brand, which 

ensures that even the cards from smaller, lesser-known issuers such as 

credit unions and small banks are accepted. Issuers and card network 

representatives also told us that surcharges are illegal in some states and 

would diminish cardholders’ expectations for the use of their card.49 They 

 

49The states that prohibit surcharging for credit cards include California, Colorado, 

Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, and Texas. 

Page 39 GAO-10-45 Credit Card Interchange Fees
 

said that such prohibitions were intended to eliminate bait-and-switch 

tactics, in which merchants would advertise a low price, only to increase it 

at the point of sale if the customer used a credit card. 

Although the United States 

Does Not Regulate 

Interchange Fees, Card 

Cost Concerns Have 

Prompted Investigations, 

Lawsuits, and Actions in 

Other Countries 

Interchange fees are not regulated at the federal level in the United States. 

The Federal Reserve, under TILA, is responsible for implementing 

requirements relating to the disclosure of terms and conditions of 

consumer credit, including those applicable to credit card fees.50 The 

various depository institution regulators—Federal Reserve, OCC, FDIC, 

Office of Thrift Supervision, and National Credit Union Administration—

conduct examinations that can address how banks, thrifts, and credit 

unions that issue credit cards are complying with the TILA card disclosure 

requirements.51 However, Federal Reserve staff told us that because 

interchange fees are paid by merchants’ financial institutions and not 

directly assessed to consumers, such fees are not required to be disclosed 

to consumers. Staff from some of the banking regulators told us that they 

do not review the level at which interchange fees are set during their 

examinations, but instead review interchange fees as a revenue source for 

the institutions or the effect they may have on the financial stability of the 

issuer. Additionally, through the Federal Financial Institutions 

Examinations Council, the regulators also conduct annual examinations of 

the card networks to ensure that these entities are adequately managing 

the operational risks involved with card processing to ensure that such 

operations are conducted so as to reduce the potential for them to create 

financial problems for their institutions. Such examinations are done as a 

part of a program to review the activities of vendors or processors that 

provide services to depository institutions. Regulator staff told us that 

their oversight does not involve assessing how the networks set 

interchange fees. 

Although no U.S. entity specifically regulates credit card interchange fees, 

card networks’ practices can be subject to regulatory action by authorities 

responsible for enforcing competition laws. In the United States, DOJ and 

FTC have jurisdiction over credit card networks and issuers as part of 

enforcing U.S. antitrust laws or the Federal Trade Commission Act. As a 

 

50See Federal Reserve Regulation E, 12 C.F.R. Part 226. TILA is set forth in Title I of the 

Consumer Credit Protection Act. See 15 U.S.C. § 1601, et. seq. 

51FTC generally has responsibility for enforcing TILA and other consumer protection laws 

for credit card issuers that are not depository institutions. 

Page 40 GAO-10-45 Credit Card Interchange Fees
 

result, DOJ and FTC can investigate if the imposition of interchange fees 

or other network or issuer practice constitutes an anticompetitive or 

unfair business practice prohibited by these laws. 

The card networks’ practices, including interchange fees, have been the 

subject of past and current investigations under these laws. As discussed 

previously, in 1998, DOJ sued Visa and MasterCard for alleged antitrust 

violations regarding, among other things, how these networks’ rules in 

effect prevented issuers from issuing cards on their competitors’ 

networks.52 The court found that Visa’s and MasterCard’s “exclusionary 

rules,” which prohibited member institutions from issuing cards by 

Discover and American Express, were a substantial restraint on 

competition in violation of the Sherman Act. Although the networks’ 

imposition of interchange fees was specifically not the subject of the DOJ 

action, the trial court concluded that Visa and MasterCard had market 

power in the market for network services, citing large market shares in a 

highly concentrated market.53 DOJ officials reported that they currently 

have another investigation under way in which they have been reviewing 

whether some of the networks’ rules are anticompetitive. As discussed 

earlier, these rules include those that prevent merchants from steering 

customers to other forms of payment, levying surcharges for card 

transactions, or discriminating against cards by type. DOJ staff told us 

they have requested information from American Express, Discover, 

MasterCard, and Visa as part of this investigation. They were not able to 

provide an estimate for when any formal action resulting from the 

investigation might occur. 

Interchange fees and other card network practices also have been the 

subject of private lawsuits. Since the mid-1980s, various lawsuits alleging 

problems with interchange fees and other card network practices have 

been litigated, as described in table 3.54 As of September 2009, a class 

action was pending in the United States District Court for the Eastern 

District of New York, in which merchants claim that interchange fees have 

an anticompetitive effect that violates the federal antitrust laws. This case 

 

52See United States v. Visa U.S.A., Inc., 344 F.3d 229 (2d Cir. 2003), aff’g, 163 F . Supp. 2d. 

322 (S.D.N.Y. 2001) and cert. denied, 543 U.S. 811 (2004). 

53344 F.3d at 240. 

54For more information on these cases, see GAO, Credit and Debit Cards: Federal Entities 

Are Taking Actions to Limit Their Interchange Fees, but Additional Revenue Collection 

Cost Savings May Exist, GAO-08-558 (Washington, D.C.: May 15, 2008), 56. 

Page 41 GAO-10-45 Credit Card Interchange Fees
 

is a consolidation of at least 14 separate lawsuits against Visa and 

MasterCard and their member institutions that had been in four separate 

districts.55

Table 3: Litigation Involving Card Network Practices 

Date Issues involved in litigation Outcome 

Mid-1980s NaBanco–a third-party credit card processor—alleged that 

interchange fees constituted unlawful price fixing and had an 

anticompetitive effect.a

 

The court ruled that NaBanco failed to prove that the 

interchange fee at issue was an unlawful restraint of 

trade. 

1993 In re Visa Check/Mastermoney Antitrust Litigation (Wal-Mart 

case)–Visa and MasterCard rules requiring merchants to accept 

debit cards as a condition of accepting credit cards were 

challenged by merchants as unlawful tying and devices to impose 

anticompetitive interchange fees.b

 

The case was settled in December 2003. 

1998 DOJ case–Action included claim that Visa and MasterCard 

violated the Sherman Antitrust Act by enforcing their respective 

versions of a rule barring their member institutions from issuing 

American Express or Discover cards.c

The court found Visa’s and MasterCard’s exclusivity 

rules were a restraint on competition in violation of 

the Sherman Act. 

2008 Kendall Decision—Merchants alleged that the defendants (Visa, 

MasterCard, Bank of America, Wells Fargo Bank, and U.S. Bank) 

conspired to set merchant discount fees and interchange fees in 

violation of Section 1 of the Sherman Act and Section 16 of the 

Clayton Act.d

 

The claim was dismissed because it failed to allege 

facts sufficient to establish a conspiracy. 

Sources: 

a

National Bancard Corp. v. Visa U.S.A., Inc. 596 F. Supp. 1231 (S.D. Fla. 1984), aff’d, 779 F.2d 592 

(11th Cir. 1986). 

b

In re Visa Check/Mastermoney Antitrust Litig., 396 F.3d 96 (2d Cir. 2005), aff’g 297 F. Supp. 2d 503 

(E.D.N.Y., 2003). 

c

United States v. Visa U.S.A., Inc., 344 F.3d 229 (2d Cir. 2003), aff’g, 163 F . Supp. 2d . 322 

(S.D.N.Y. 2001), Cert. Denied, 543 U.S. 811 (2004). 

d

Kendall v. Visa U.S.A., Inc., 518 F.3d 1042 (9th Cir. 2008), aff’g 2005 U.S. Dist. LEXIS 21450 (N.D. 

Cal., July 25, 2005). 

 

55In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, 2006 

U.S.Dist. LEXIS 45727; 2006-1 Trade Cas. (CCH) P75,278 (E.D.N.Y.). 

Page 42 GAO-10-45 Credit Card Interchange Fees
 

While interchange fees are not regulated in the United States, as of 

September 2009, more than 30 countries have acted or are considering 

acting to address competition or card cost concerns involving payment 

cards.56 Some actions taken by these countries include the following: 

• regulating relationships between merchants and issuers and card 

networks, such as prohibiting card networks from imposing certain rules 

on merchants; 

• establishing maximum interchange fees or capping average interchange 

fees; 

• allowing more institutions to enter the credit card market by changing the 

requirements to allow more institutions to qualify to act as issuers or 

acquirers; and 

History of Credit Interchange 

Fee Reform in Australia

After a government study reported that interchange 

fees were above levels that could be justified, the 

Reserve Bank of Australia (RBA) took various

actions, beginning with capping the average 

interchange fees Visa and MasterCard charged. In 

2003, Visa and MasterCard were required to reduce 

their interchange fees from a weighted average of 

about 0.95 percent to about 0.5 percent and to 

eliminate rules restricting merchants’ ability to 

impose surcharges for credit cards, In addition, 

beginning in 2007, these networks had to allow 

merchants to accept only credit or debit cards from 

a network, and allow merchants to steer their 

customers toward lower-cost forms of payment. 

Credit card payments have continued to grow, but at 

a slower rate than before these changes, as more 

consumers switched to debit cards. RBA studied the 

impact of these reforms and issued a report in 

September 2008 in which regulators concluded that 

the reform program had achieved its main objectives

of improving competition in the payment card market 

and providing consumers with more information 

about the costs of various types of payment. In 

August 2009, RBA issued a statement that it would 

continue to regulate interchange fee rates at 0.5 

percent.

• conducting investigations into the functioning of the payment card market, 

including legal antitrust proceedings. 

For example, authorities in Australia have taken various actions regarding 

credit card interchange fees and other card network practices since 2003 

(see sidebar). In recent years, the European Commission has undertaken 

proceedings against card networks and set caps on cross-border 

interchange fees—those applying to card transactions in which a card 

issued in one country is used to make a purchase in another country—that 

affect transactions occurring in 31 European countries.57 In 2007, the New 

Zealand Commerce Commission initiated proceedings against Visa and 

MasterCard and issuers of their cards that alleged price-fixing in the 

setting of fees. This resulted in an August 2009 settlement that included 

various actions affecting Visa cards, including directing acquirers and 

issuers to bilaterally negotiate interchange fees instead of having the 

 

56Federal Reserve economists and others report that these countries include Argentina, 

Australia, Austria, Brazil, Canada, Chile, Colombia, Denmark, Finland, France, Germany, 

Hungary, Israel, Italy, Mexico, New Zealand, Norway, Panama, the People’s Republic of 

China, Poland, Portugal, Romania, Singapore, South Africa, South Korea, Spain, Sweden, 

Switzerland, Turkey, the United Kingdom, as well as others in the European Commission. 

See Terri Bradford and Fumiko Hayashi, “Developments in Interchange Fees in the U.S. 

and Abroad” (Payments System Research Briefing, Federal Reserve Bank of Kansas City, 

April 2008) and GAO-08-558. 

57These countries are part of the European Economic Area, which includes the 27 members 

of the European Union as well as the members of the European Free Trade Association 

(Iceland, Liechtenstein, Norway, and Switzerland). 

Page 43 GAO-10-45 Credit Card Interchange Fees
 

network set them, removing that network’s “no surcharge” rule and “no 

steering” rules, and allowing nonbank organizations to participate in the 

market as issuers or acquirers. Other countries are considering taking 

actions. For example, in June 2009, Canada’s Standing Committee on 

Banking, Trade and Commerce reported the results of an investigation into 

this market, and recommended a number of actions, including permitting 

merchants to surcharge and steer customers toward low-cost payment 

methods, requiring merchants to disclose interchange fees to consumers, 

and prohibiting card networks’ “honor all cards” rules. 

Concerns about the rising costs of card acceptance for merchants have led 

to regulatory measures in some foreign jurisdictions and legislative 

initiatives in the current U.S. Congress. 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. 

Industry participants and others cited a variety of advantages and 

disadvantages associated with each option and suggested that the 

categories of stakeholders—such as merchants or issuers or large 

merchants versus small merchants—would be affected differently. They 

also noted that, in some cases, the ultimate impact of the option was not 

clear. A more detailed discussion of industry participants and others’ 

views on the merits of each of the options can be found in appendix II. 

Although Various 

Options to Lower 

Interchange Fees 

Exist, Impacts on 

Cardholders Could Be 

Mixed and Each 

Option Has 

Implementation 

Challenges 

Each of these options is designed to lower merchants’ costs for card 

acceptance. For example, setting or capping interchange fees would limit 

the amount of interchange fees charged to merchants. 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. Requiring the disclosure of interchange fees could 

lower merchants’ fees if consumers changed their behavior after seeing 

the different costs associated with different forms of payment, and shifted 

from higher-cost forms of payment such as rewards and other credit cards 

toward less expensive forms of payment, such as debit cards. The option 

to eliminate certain network rules, such as the no-discrimination or nosurcharge rule, could allow merchants to either refuse to accept higherPage 44 GAO-10-45 Credit Card Interchange Fees
 

cost cards or receive additional revenue from the consumer to help cover 

the costs of the interchange fees.58 For example, a study of surcharging in 

the Netherlands reported that when merchants placed a surcharge on 

payment cards, customers there used that form of payment less often.59

The ability to take these actions could provide merchants with bargaining 

power to more effectively negotiate with the card networks and issuers 

over interchange fee rates, even in merchants did not exercise this ability. 

Refusing to take certain cards issued by a network, such as those with 

higher interchange fees, could prompt networks and issuers to reduce the 

prevalence of such cards. Direct negotiation between merchants and 

issuers under an antitrust waiver also could grant merchants increased 

bargaining leverage in negotiating interchange fee rates and terms, with a 

goal of lower costs to merchants. 

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. With 

lower card acceptance costs, merchants may pass on their interchange fee 

savings through lower prices to consumers; however, the extent to which 

they would do so is unclear.60 As discussed previously, consumers—even 

those paying with cash and by check—may be paying higher prices 

because of merchants’ increased costs of interchange fees. By capping 

interchange fees, RBA estimates that fees to merchants were lower by 

about 1.1 billion Australian dollars for the period of March 2007 through 

February 2008, but officials acknowledged that it would be very difficult to 

provide conclusive evidence of the extent to which these savings have 

resulted in lower retail prices because so many factors affect such prices 

at any one time. Moreover, the degree of savings depends on whether or 

not merchants are increasing their prices because of higher interchange 

fee costs. Some merchant representatives we interviewed told us that 

merchants would take different steps to improve customer service if 

interchange fees were lowered, such as hire more employees. Customers 

 

58Use of this option would have to be reconciled with state laws that, as previously noted, 

prohibit surcharges on credit card use. 

59See Wilko Bolt, Nicole Jonker, and Corry van Renselaar, “Incentives at the Counter: An 

Empirical Analysis of Surcharging Card payments and Payment Behaviour in the 

Netherlands,” (Working paper, De Nederlandsche Bank, December 2008). 

60Federal Reserve economists noted that the extent to which merchants would pass on 

their interchange fee savings likely would depend on the competitiveness of the markets in 

which the merchants operate. 

Page 45 GAO-10-45 Credit Card Interchange Fees
 

also may not experience lower prices if merchants’ overall costs do not 

decrease. Several industry participants speculated that if merchants were 

allowed to refuse higher-cost cards, merchants would lose sales from 

customers using premium credit cards, who, network and issuer officials 

told us, spend more than customers using basic credit cards. A study of 

the Australian reforms by several economists reported that because the 

actual decrease in merchant costs was very small, merchants may have 

hesitated to lower prices, especially when their other costs might have 

been changing.61

Lowering interchange fee revenues for issuers could prompt issuers to 

increase cardholder costs or curtail cardholder credit availability. In 

Australia, issuers reduced rewards and raised annual fees following that 

country’s interchange fee cap. In addition, with less interchange fee 

income, representatives of smaller issuers such as community banks and 

credit unions told us that they likely would not offer rewards cards and 

therefore would be unable to compete with the larger issuers in the 

market. One credit union official told us that the credit union could not 

offer credit cards because of the expense involved with running such a 

program. In addition, representatives of credit unions and community 

banks we interviewed said that they benefited from a network system that 

developed interchange rates to attract both merchants and issuers. 

Allowing merchants to refuse certain cards or negotiate rates directly with 

the issuers would eliminate smaller institutions from the process. 

Representatives of larger issuers told us that with less revenue from 

interchange fees, they would consider reducing the amount of credit they 

make available to their cardholders. Australian officials reported that 

since their reforms were instituted, the number of credit card accounts in 

Australia has continued to increase and smaller credit unions have 

remained in the credit card business, albeit with some of their operations 

outsourced. 

Each of these options for lowering card fee costs presents challenges for 

implementation that would need to be overcome. For example, if 

interchange fees were capped or limited, an oversight agency or 

organization would have to be designated to determine how and to what 

level such fees should be set. In addition, economists and other 

 

61See Howard Chang, David S. Evans, and Daniel D. Garcia-Swartz, “The Effect of 

Regulatory Intervention in Two-Sided Markets: An Assessment of Interchange-Fee Capping 

in Australia,” Review of Network Economics, 4(4). December 2005, 328-358. 

Page 46 GAO-10-45 Credit Card Interchange Fees
 

researchers noted that determining an optimal level that effectively 

balances the costs and benefits among the networks, issuers, merchants, 

and consumers would be very difficult to do. When Australian officials set 

their interchange fee cap, they did so based on their assessment of the 

benefits and costs of different payment methods, but they also told us that 

many years of data would be needed to determine the effectiveness of the 

rate cap. If interchange fees were disclosed to consumers, issuers and 

merchants said that consumers might find the additional information 

confusing, and some merchants said that their cashiers might not be able 

to clearly communicate the correct interchange fee for the specific 

transaction. For the option that would allow merchants to discriminate 

among cards and add a surcharge for more expensive credit card 

transactions, merchants said that it would be difficult for them to 

determine which cards carry higher interchange rates.62 Finally, the 

proposal to allow merchants to directly negotiate with issuers raised 

several issues from the industry participants we interviewed. They said 

that such negotiations could harm small merchants and small issuers, 

which do not have as much leverage as larger participants and, in some 

cases, lack the resources to participate in bargaining sessions. In addition, 

prudent exercise of this option would require an exemption from federal 

antitrust laws, which include provisions designed to protect consumers 

from the consequences of agreements in restraint of trade. DOJ officials 

have expressed their historical opposition to efforts to create exemptions 

to antitrust laws, stating that these exemptions should be used only in the 

rare instances in which a public policy objective compellingly outweighed 

free market values. 

Although each option had advantages and disadvantages and difficulties in 

implementation, removing the networks’ antisteering rules and restricting 

interchange fees with a cap or other limit were the two options that 

appeared to receive the most support from the large and small merchants 

and merchant trade associations with which we spoke. Removing the 

antisteering rules appears to have various advantages, including providing 

merchants with the ability to send signals to cardholders about which 

cards increase merchant acceptance costs, a change that could improve 

merchants’ leverage in negotiating their payment costs. Merchants’ ability 

to surcharge or refuse certain cards also could cause cardholders using 

rewards cards to be more aware of and to bear more of the cost of the 

 

62As discussed earlier, Visa and MasterCard allow issuers to upgrade a card to a rewards 

status with higher interchange fee without issuing the cardholder a new card. 

Page 47 GAO-10-45 Credit Card Interchange Fees
 

rewards from which they currently benefit. This option also may require 

the least intervention, as merchants could decide whether to add 

surcharges or refuse certain cards based on their own customer mix. In 

addition, the potentially anticompetitive effects of these rules are also the 

subject of the current DOJ investigation and some of the private lawsuits. 

A significant advantage of capping or limiting interchange fees would be 

that it would reduce interchange fee costs most directly. The experience in 

Australia indicates that this option does lower merchant costs and 

Australian regulators and merchant representatives insist that consumers 

have also benefited, arguing that merchants in competitive markets 

generally lower prices. The main challenges to implementing this option 

are determining the right level of reduction, such as capping interchange 

rates at a level below that of rewards cards, and tailoring the change to 

avoid unintended effects on other networks or on smaller issuers. 

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. Through 

informal discussions, staff from DOJ, the Federal Reserve, Federal Deposit 

Insurance Corporation, and the National Credit Union Administration 

noted the quality of the report. Each of these agencies, as well as the 

Office of the Comptroller of the Currency and the Office of Thrift 

Supervision, also provided technical comments that were incorporated 

where appropriate. Federal Trade Commission staff noted they had no 

comments on the report. 

Agency Comments 

and Our Evaluation 

We are sending copies of this report to interested congressional 

committees and members, the Department of Justice, Federal Trade 

Commission, Board of Governors of the Federal Reserve, the Office of the 

Comptroller of the Currency, the Office of Thrift Supervision, the Federal 

Deposit Insurance Corporation, the National Credit Union Administration, 

and other interested parties. In addition, this report will be available on 

our Web site at http://www.gao.gov. 

Page 48 GAO-10-45 Credit Card Interchange Fees
 

If you or your staffs have any questions about this report, please contact 

me at 202-512-8678 or cackleya@gao.gov. Contact points for our Office of 

Congressional Relations and Office of Public Affairs can be found on the 

last page of this report. GAO staff who made major contributions to this 

Alicia Puente Cackley 

report are listed in appendix III. 

Director, Financial Markets and 

 Community Investment 

Page 49 GAO-10-45 Credit Card Interchange Fees
Appendix I: Objectives, Scope, and 

Methodology 

Page 50 GAO-10-45 

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. 

To assess how the fees merchants pay for accepting credit cards have 

changed over time, we reviewed relevant literature and analyzed available 

data on interchange fee rates provided by Federal Reserve staff, a large 

merchant, and a large credit card processor. To describe the factors 

affecting the competitiveness of the credit card market, including how 

credit card competition has affected consumers and merchants, we 

summarized economic and other academic literature. Our literature review 

built upon key studies to which experts we interviewed referred and 

which we found by reviewing research databases such as Econlit and 

through general Internet searches. In our literature review, we sought to 

summarize a diverse body of literature that described various views on the 

economics and policy implications of interchange fees. We also 

interviewed representatives and analyzed data from the four major credit 

card networks (American Express, Discover, MasterCard, and Visa) and 

several banking and acquiring trade associations, the members of which 

include large and small institutions that participate in the credit card 

system: the American Bankers Association, the Electronic Transfer 

Association, the Independent Community Bankers of America, the Credit 

Union National Association, and the National Association of Federal 

Credit Unions. In addition, we conducted interviews and analyzed data 

from three of the largest credit card issuers as measured by total 

outstanding credit card loans, as of December 31, 2007, in the Card 

Industry Directory and three of the largest credit card acquirers in the 

United States.1

 We also met with representatives of several small credit 

unions and community banks that issue credit cards. However, public 

information on interchange fee revenue, card issuers’ costs, and other 

quantitative data from card networks and issuers is limited and ongoing 

litigation limited these entities’ ability to share such information with us. 

 

1

Card Industry Directory: The Blue Book of the Credit and Debit Card Industry in North 

America, 20th ed. (Chicago, Ill., 2008) 

 Credit Card Interchange Fees 
Appendix I: Objectives, Scope, and 

Methodology 

To learn more about merchants’ costs for accepting credit cards, we 

consulted relevant literature and interviewed and reviewed payment cost 

data provided by several merchant trade associations, large national retail 

merchants, and small merchants from two local Chambers of Commerce. 

We met with officials from the National Retail Federation, the National 

Grocers Association, the Food Marketing Institute, the National 

Association of Convenience Stores, the Retail Industry Leaders 

Association, and the Small Business and Entrepreneurship Council. We 

met with representatives of 10 of the largest retail merchants in the United 

States; 8 of these represented 42 percent of the wholesale and retail trade 

industries listed in the S&P 500 in 2008, as well as one privately owned 

large company and one publicly traded large company that were not listed 

on the S&P 500. We selected the wholesale and retail categories because 

merchants in these industries accept and receive payments from 

consumers. We also selected small merchants to interview from the 

Washington, D.C., and Springfield, Virginia, Chambers of Commerce. 

These merchants represented a diverse group of businesses, including 

boutique shops, sports clubs, and a health care professional. In addition, 

we interviewed representatives of other organizations from across the 

country that accept payments from consumers, including hospital owners, 

utility companies, and a city government official. Although we selected 

merchant representatives to provide broad representation of merchant 

experiences with accepting credit cards, their responses may not be 

necessarily representative of the universe of small and large merchants. As 

a result, we could not generalize the results of our analysis to the entire 

market for merchant experiences with accepting credit cards and paying 

interchange fees. Where possible, we obtained information from card 

networks about benefits to merchants. 

To describe the regulation of interchange fees both in the United States 

and in other countries, we met with officials from the Board of Governors 

of the Federal Reserve System, the Office of the Comptroller of the 

Currency, the Office of Thrift Supervision, the Federal Deposit Insurance 

Corporation, and the National Credit Union Administration. We also 

reviewed studies of the impact of interchange fee reforms in other 

countries, and interviewed officials from the Reserve Bank of Australia on 

their actions related to interchange fees because Australia was one of the 

first countries to act, and sufficient time has passed to allow information 

on the impact of their actions to be available. To discuss federal antitrust 

activities, we interviewed officials from the Department of Justice and the 

Federal Trade Commission and updated our summary of major federal 

antitrust actions surrounding interchange rates from our 2008 report. Our 

interviews with industry participants, academics, and regulators also 

Page 51 GAO-10-45 Credit Card Interchange Fees
Appendix I: Objectives, Scope, and 

Methodology 

provided us with an understanding of the potential impact of various 

proposals to lower interchange fees. 

Quantitative information used in this report was attributed to its source 

and supported by other corroborative evidence, such as industry sources, 

federal regulatory data, or interviews. In some instances we were able to 

do some testing of the data. We believe that these data are sufficiently 

reliable for the purposes of showing general trends in the credit card 

industry and merchant experiences with accepting credit card payments. 

We conducted this audit in Washington, D.C., from May 2009 to November 

2009, in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives. 

Page 52 GAO-10-45 Credit Card Interchange Fees
Appendix II: Re

Interchan

Card Ac

view of Options to Regulate 

ge Fee Rates and Terms of Credit 

ceptance 

Page 53 GAO-10-45 

Appendix II: Review of Options to Regulate 

Interchange Fee Rates and Terms of Credit 

Card Acceptance 

Options to address increasing costs of interchange fees include setting or 

limiting interchange fees, with the intent of lowering costs for merchants 

and, potentially, consumers. For example, a regulatory agency could cap 

interchange fees at a single rate or an average rate or work with industry 

participants—such as networks, issuers, and merchants—to decrease the 

fees. Some countries have limited interchange fees using such methods. 

The Reserve Bank of Australia (RBA) has set a limit under which the 

weighted average of MasterCard and Visa interchange fees must fall. The 

European Commission recently reached an agreement with MasterCard 

that limits the average interchange fees that it can charge for cross-border 

transactions (purchases made in one country using a credit card issued in 

another) in the European Union. In addition, governments in other 

countries, such as Mexico, have worked with industry participants to 

voluntarily decrease interchange fee rates.1

Option 1: Limiting or 

Capping Interchange Fees 

Merchants could realize lower costs if interchange fees were limited.2

 As 

discussed previously, many merchants are concerned that their 

interchange fee-related expenses have increased significantly in recent 

years. Some merchants in very competitive industries, such as retail and 

gas stations, told us that because they were unable to increase prices to 

cover increases in their interchange fees, their slim profit margins had 

further decreased in recent years. A representative of one franchise told us 

that even if interchange fees were capped at their current rates, this cap 

would help ensure long-term profitability. 

Furthermore, consumers might benefit if merchants passed on their 

savings through lower prices. However, many industry participants 

acknowledged that it would be difficult to prove a direct link between 

lower interchange fees and lower consumer prices. Merchants and 

representatives of merchants in the retail industry have argued that 

because retail is one of the most competitive industries, retailers would 

have to lower prices if their interchange fee-related costs decreased. 

However, other industries may face pricing constraints. For example, 

representatives of two utility companies told us that they could not change 

 

1

For a discussion of changes in Australia, Israel, and Mexico, see GAO-08-558. 

2

Overall merchant discount fees may not decrease if card networks, issuers, or acquirers 

respond to decreased interchange fees by increasing other fees that make up total 

merchant discount fees. In addition, American Express and Discover do not have 

interchange fees. However, representatives of both card networks told us that that fee 

limits likely would affect them indirectly because they would have to decrease their 

merchant discount fees to compete with the other card networks. 

 Credit Card Interchange Fees 
Appendix II: Review of Options to Regulate 

Interchange Fee Rates and Terms of Credit 

Card Acceptance 

their prices without first getting approval from their respective regulatory 

bodies. Several economists have argued that the ability of merchants to 

pass on their savings from lower interchange fees would depend heavily 

on the respective merchants’ size and market share, as well as other 

factors. While the amount of the price reduction might depend on these 

factors, some studies have demonstrated that a reduction in retailer costs 

in the competitive gasoline industry can lead to savings for consumers.3

The Reserve Bank of Australia has estimated that savings to Australian 

consumers from decreased interchange fees and other interchange 

reforms likely exceeded 1.1 billion Australian dollars for the period of 

March 2007 to February 2008, but officials acknowledged that it would be 

very difficult to provide conclusive evidence of these savings. Others have 

argued that Australian merchants have not passed savings on to 

consumers, some of them citing economic literature that argues that such 

a reduction in merchant costs would not affect retail prices very quickly, 

even in the context of extensive competition.4

In contrast, limiting interchange fees could decrease the interchange 

revenues of issuers, but the impact on issuers would depend largely on the 

way in which the option is implemented. For instance, if an interchange 

fee cap were set at a level significantly below the current rates and applied 

to all interchange fees charged, then all issuers could be affected. But a 

cap also could be set at a relatively high rate, such as at the maximum rate 

for standard credit cards, or certain issuers could be excluded from the 

regulation. Card issuers, especially small issuers, oppose any option that 

would decrease their interchange fee revenues significantly. According to 

some industry participants, smaller issuers such as credit unions and 

community banks rely more heavily on such revenue than large banks, 

which receive more income from interest and other cardholder fees. 

Representatives of a credit union association told us that revenue from 

interchange fees made up over 20 percent of most credit unions’ total card 

revenues. Several representatives of community banks and credit unions 

told us that they likely would not be able to offer rewards cards without 

 

3

For example, see Severin Borenstein, A. Colin Cameron, and Richard Gilbert. “Do Gasoline 

Prices Respond Asymmetrically to Crude Oil Price Changes?” The Quarterly Journal of 

Economics, 112, no. 1 (February 1997): 305-339. 

4

See Robert Stillman and others. “Regulatory Intervention in the Payment Card Industry by 

the Reserve Bank of Australia: Analysis of the Evidence,” CRA International (London, 

United Kingdom: Apr. 28, 2008). 

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the revenues they received from interchange fees, and not offering such 

cards would decrease their overall ability to compete with larger banks. 

In addition, many industry participants and others agreed that the costs of 

card acceptance might shift from merchants to cardholders if interchange 

fees were limited, card surcharges permitted, and interchange revenues 

decreased. However, they did not agree on whether the shift would be 

positive or negative. Some researchers have argued that such a shift would 

lead to more efficient outcomes, because cardholders would pay for the 

benefits—such as rewards—that they enjoyed. Or, as some economists 

have noted, cardholders faced with higher costs for using their credit 

cards might change their behavior by using rewards cards less frequently 

and opt for alternative payment methods such as debit cards, which could 

result in lower costs for merchants. Other economists have argued that 

any consumer savings from lower prices would not be sufficient to offset 

the negative impacts on cardholders. Representatives of issuers and card 

networks we interviewed told us that this option would affect cardholders 

negatively, because issuers likely would respond to their reduced 

interchange fee income by increasing cardholders’ annual fees and other 

user fees, decreasing the value of rewards points, and possibly increasing 

interest rates and decreasing available credit. In Australia, cardholders’ 

benefits as a portion of spending dropped an average of 23 percent from 

2003 to 2007 following the interchange fee reforms.5

Moreover, a limit on interchange fees could affect merchants negatively if 

this option led to decreased overall retail sales or available credit. Some 

industry participants and others pointed to studies that illustrate that 

consumers tend to spend more when paying with credit cards than when 

using other payment methods, and that rewards cardholders spend even 

more than nonrewards cardholders. If consumers shifted from using 

rewards cards in response to decreased rewards and increased annual and 

user fees, merchants might realize lower sales revenues overall. Issuers, if 

faced with lower interchange fee revenues, could decide that some credit 

card programs were too expensive to maintain and might cut credit to 

cardholders, including merchants that depend on credit to finance 

business expenses. For example, the results of the National Small 

Business Poll indicate that about 74 percent of small businesses use 

 

5

Source: GAO analysis based on data presented in RBA, “Reform of Australia’s Payment 

System: Issues for the 2007/2008 Review.” (Sydney, Australia: May 2007). 

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business credit cards and about 39 percent use personal credit cards for 

business purposes.6

If the fee limit option were chosen, a challenge for implementation would 

be setting and maintaining interchange fees at a level that effectively 

balanced the costs among networks, issuers, merchants, and consumers, 

which economists and others agree would be very difficult to do. 

Australian officials set their interchange fee limit using a cost-based 

approach, which they characterized as practical and meeting legislative 

requirements. They chose a cap based on the costs that issuers would 

incur for authorization and processing, fraud and fraud prevention, and 

funding the interest-free period; the costs of credit losses were not 

included. Using such an approach would require specialized knowledge of 

the benefits and costs of different payment methods, some of which may 

be difficult to measure accurately. In addition, industry participants and 

others do not agree on which costs should be covered by interchange fees; 

some issuers and card networks have argued that the fees should cover 

credit losses, but others have argued that issuers should cover credit 

losses with their interest revenues. Considerable cost also could be 

involved for an agency to collect and analyze extensive data from industry 

participants on interchange-related costs and benefits. 

Option 2: Requiring the 

Disclosure of Interchange 

Fees 

A second option to address concerns about interchange fees would require 

the disclosure of interchange fees to consumers and is intended to 

increase their awareness of the fees and change their payment behavior. 

The fees could be disclosed to consumers on sales receipts, on consumers’ 

card statements, or through generic notices that merchants would post 

advising their customers about interchange fee costs. Although Visa and 

MasterCard officials told us that their rules currently do not prohibit 

merchants from posting their interchange fee costs, other merchants and 

representatives from a large acquiring bank told us that this option is 

difficult to implement because merchants are unable to ascertain 

interchange fee costs until they submit payments for processing. As 

discussed previously, interchange fees vary depending on the type of card 

used and the method of processing used. 

Disclosing interchange fees to consumers could result in lower costs to 

merchants, which then could pass the savings to consumers, but only if 

 

6

NFIB Research Foundation, “Credit Cards,” National Small Business Poll 8, no. 3 (2008). 

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consumers responded to such disclosures by decreasing their use of 

relatively expensive cards. Proponents contend that consumers deserve to 

understand interchange expenses facing merchants because consumers 

could be paying for at least a portion of these fees. If consumers shifted 

from using relatively costly credit cards to less expensive forms of 

payment, this would decrease interchange costs for merchants, which in 

turn could lower prices for consumers. However, many of the industry 

participants and others with whom we spoke predicted that most 

consumers would disregard information about interchange fees. 

Such disclosures could be confusing for consumers. Merchants, issuers, 

and card networks expressed concern that their customers might not 

understand the information and might misinterpret the fees listed on the 

receipt or bank statement as an additional charge, rather than as a 

component of the total price. Merchants told us that it is very difficult for 

cashiers to distinguish between the numerous types of debit and credit 

cards, which have varying interchange rates. Thus, it could be very 

complicated for a cashier to clearly communicate to the consumer the 

correct interchange fee for the specific transaction. 

Additionally, whichever party is responsible for disclosing information 

about interchange fees to consumers would incur the costs of updating its 

technology to allow for such disclosures. For disclosure in merchant 

receipts, merchants would incur the cost of changing their receipts. 

Issuers have reported that changes to card statements, such as the 

inclusion of additional disclosures, would generate costs for them. 

Option 3: Loosening 

Restrictions on Merchants 

for Card Acceptance 

A third option would prohibit card networks (and other entities) from 

imposing rules on merchants that limit their ability to discriminate among 

different types of cards, or levy a surcharge for accepting credit cards.7

The broad intent of this option is to decrease the costs to merchants of 

accepting cards by allowing them to steer their customers toward less 

expensive forms of payment. As discussed earlier, card networks generally 

impose rules on merchants that accept their cards, such as not allowing 

merchants to add a surcharge or discriminate among cards issued by the 

same network and prohibiting minimum purchase amounts. 

 

7

Some entities other than card networks have rules regulating merchant acceptance of 

cards for payment. For example, as discussed earlier, some states have laws that prohibit 

merchants from adding a surcharge for accepting credit cards. 

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For merchants, the primary benefit of removing one or more of the 

restrictions for card acceptance could be lower costs. If the rule that 

merchants must honor all cards from a network were relaxed, merchants 

could refuse to accept cards with high interchange fees. For example, 

many of the merchants we interviewed with small average purchase 

amounts, such as convenience store owners, told us that they would 

receive significantly more benefits from accepting cards if they could steer 

consumers away from using cards with high interchange fees, especially in 

cases in which the purchase amount was lower than the total merchant 

discount fee. Several merchants told us that they would apply a minimum 

purchase amount for credit cards if they were allowed to, while one small 

merchant told us that its store already did so. If merchants could levy a 

surcharge, they also could receive additional revenue to cover their 

interchange fee-related costs. Although card networks allow merchants to 

discount for cash purchases, as required by law, some merchants and 

others have argued that the network rules and state requirements 

surrounding cash discounting make the practice too complicated. 

Merchants explained that currently they have to post a cash price and a 

card price for each item to offer cash discounts, which could confuse or 

irritate their customers, so an option that allowed merchants to add a 

surcharge and refuse certain cards would be a more feasible way for 

merchants to decrease their interchange fee-related costs. 

This option also could improve merchants’ bargaining power with card 

networks and issuers. According to some industry participants and 

researchers, the only leverage that merchants currently have to control 

their interchange-related expenses is to refuse to accept all of the cards of 

a given network.8

 As discussed previously, given the large market share of 

Visa and MasterCard, customers expect to be able to use those cards at a 

wide variety of merchants, and several of the merchants we interviewed 

told us they would lose sales if they refused to accept all cards from either 

of these networks. Some merchants told us that they would have a greater 

ability to manage their costs with the option to surcharge for credit cards 

or not accept cards with higher interchange fees. 

This option also may reduce merchant costs as consumers shift away from 

higher-cost forms of payment (such as rewards cards) to less expensive 

forms of payment (such as debit cards). Some industry participants and 

 

8

As discussed previously, the Department of Justice (DOJ) is currently reviewing whether 

the current rules are anticompetitive. 

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academic researchers have argued that such a shift would lead to more 

efficient outcomes such as lower prices for consumers (merchants might 

lower prices if interchange costs decreased). As mentioned previously, all 

consumers, even those paying with cash or check, bear the cost of 

merchants’ costs for card acceptance. Proponents of this option reason 

that without signals about the costs of different payment mechanisms, 

such as limited card acceptance, surcharges, or cash discounts, consumers 

likely have overused cards with relatively high interchange fees. There is 

some empirical evidence that illustrates that surcharges can change 

consumers’ choice of payment method. For example, a recent study 

conducted in the Netherlands, which allows surcharges, showed that 

consumers there altered their behavior in response to surcharges for debit 

cards. While 25 percent of consumers surveyed said that they would use 

their debit cards regardless of an applied surcharge, the majority stated 

that surcharges affected their choice of payment, with most using cash for 

sales tickets of less than 15 euros.9

 A survey conducted in Norway also 

illustrated that consumers there were quite sensitive to consumer prices 

that reflected payment costs.10

However, removing merchant rules for card acceptance also could affect 

cardholders, issuers, acquirers, and card networks. More specifically, 

cardholders might not be able to use their cards in as many locations and 

could face higher direct costs for card usage. Credit networks, issuers, and 

acquirers also argued that consumer protection issues would arise 

because card users would be treated differently than consumers using 

other payment methods such as cash. Some industry participants and 

others were concerned about the ability of merchants operating in less 

competitive markets to set surcharges at a higher level than would be 

needed to cover their merchant discount fees, thus resulting in a new 

stream of revenue for merchants.11 Also, some noted that consumers 

would have less choice if small issuers were forced out of the market by 

reduced interchange revenues. 

 

9

See Wilko Bolt, Nicole Jonker, and Corry van Renselaar, “Incentives at the Counter: An 

Empirical Analysis of Surcharging Card Payments and Payment Behaviour in the 

Netherlands,” (Working paper, De Nederlandsche Bank, December 2008). 

10See David Humphrey, Moshe Kim, and Bent Vale, “Realizing the Gains from Electronic 

Payments: Costs, Pricing, and Payment Choice,” Journal of Money, Credit and Banking 

33, No. 2 (2001): 216-234. 

11This effect could be countered by capping the amounts merchants surcharged so that 

merchants did not charge consumers for more than their cost of accepting the card. 

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Additionally, if fewer consumers used cards and fewer merchants 

accepted cards, the overall benefits of the credit card network could 

decrease. As discussed previously, card networks can bring benefits to 

both consumers and merchants, and economists have argued that the 

benefits of a credit card network increase as more consumers use its cards 

and more merchants accept its cards. However, some economists have 

reported that the change of rules for card acceptance in Australia has not 

decreased the use of credit cards significantly and that credit card use has 

grown by at least 5 percent per year since 1995.12

If consumers shifted from using cards with higher interchange fees, 

issuers could see decreased revenues. As mentioned previously, 

interchange revenues make up a larger percentage of total revenue for 

small issuers than for large issuers. Representatives of some credit unions 

and community banks told us that they were concerned that under this 

option, merchants might discriminate against their cards. These 

representatives also told us that without sufficient interchange revenues, 

many credit unions and small banks likely would not be able to issue 

credit cards. However, representatives of RBA have reported that 

removing this network rule did not appear to have significantly decreased 

the number of smaller issuers offering credit cards. They said that some 

smaller institutions have found it commercially beneficial to outsource 

some or all of their issuing activities to larger financial institutions or 

specialist issuers. In such outsourcing arrangements, the cards still carry 

the small issuer’s name but other providers provide the credit processing, 

and the credit. To preserve the ability of small issuers to successfully issue 

cards, some industry participants, including a large merchant, suggested 

that merchants could be allowed to refuse cards on the basis of costs, but 

could be prohibited from discriminating against cards on the basis of 

issuer. 

The extent to which merchants would take advantage of changes to 

network rules on card acceptance was unclear. Many merchants of various 

sizes told us that they would not apply surcharges or refuse certain cards 

because they feared losing business, or because they thought that this 

could slow their checkout times. In addition, some merchants told us that 

they found it nearly impossible to distinguish among different types of 

credit and debit cards, making it difficult for them to determine which 

cards they should refuse or to which they should apply a surcharge 

 

12See Robert Stillman and others. “Regulatory Intervention.” 

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because of higher interchange rates. In the Netherlands and Australia, 

where merchants are allowed to levy a surcharge, many merchants have 

opted not to do so. In Australia, the number of merchants that apply a 

surcharge for credit cards has been increasing since the practice was 

allowed in 2003. However, according to a banking research firm that 

collected data on behalf of the Reserve Bank of Australia, as of June 2009, 

only about 18 percent of very small merchants, 20 percent of small 

merchants, 26 percent of large merchants, and 34 percent of very large 

merchants levied surcharges for credit cards.13 A study of surcharges on 

debit cards in the Netherlands found that about 22 percent of merchants 

added a charge for paying with a debit card (for sales below a certain 

amount).14 The results of a national poll by the National Federation of 

Independent Business indicate that 29 percent of U.S. small businesses 

who accept credit card payments would apply a surcharge for card 

payments if their contracts with card networks allowed, and about 13 

percent currently have a minimum purchase amount for credit card sales.15

Option 4: Allowing 

Merchants and Issuers to 

Directly Negotiate 

Interchange Fees 

A fourth option would allow merchants to directly negotiate with card 

issuers to reach an agreement on interchange fees and terms, which likely 

would result in lower costs for merchants. Because collective bargaining 

by commercial groups, such as groups of merchants or businesses, can 

violate U.S. antitrust laws, an exemption from those laws would be 

necessary to facilitate such a process.16 According to DOJ, the granting of 

antitrust waivers in the United States can be justified only in very rare 

cases, but participants in specific industries have been granted antitrust 

 

13East & Partners, the firm that collects the data, defines very small merchants as those 

with annual turnover between A$1 million and A$5 million, small merchants as those with 

turnover between A$5 million and A$20 million, large merchants as those with turnover 

between A$20 million and A$340 million, and very large merchants as those with turnover 

greater than A$340 million. See East & Partners, “Australian Merchant Acquiring & Cards 

Markets: Special Question Placement Report,” (Sydney, Australia: June 2009). 

14The average minimum purchase is 10 euros, and the average surcharge is about 2.3 

percent of the sales ticket for purchases under this minimum amount. See Wilko Bolt, 

Nicole Jonker, and Corry van Renselaar, “Incentives at the Counter: An Empirical Analysis 

of Surcharging Card Payments and Payment Behavior in the Netherlands.” 

15 NFIB Research Foundation, “Credit Cards,” National Small Business Poll 8, no. 3 (2008). 

16Both S. 1212 and H.R. 2695, described previously, contain exemptions from federal 

antitrust laws in connection with the negotiation process set up in those bills. The bills 

would exempt such negotiations from the antitrust laws defined in section 1 of the Clayton 

Act, 15 U.S.C. § 12, and the provisions of section 5 of the Federal Trade Commission Act 

that apply to unfair competition. 15 U.S.C. § 45. 

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waivers, including those in the insurance industry and agricultural 

cooperatives. 

According to its proponents, this option would allow merchants more 

leverage with card networks and issuers in negotiating interchange rates 

and terms and potentially lead to lower merchant costs. As discussed 

previously, some have argued that merchants, especially small merchants, 

are not able to negotiate interchange fees or terms with card networks or 

issuers, partly because of the large market shares of Visa, MasterCard, and 

the largest issuers. The large merchants we interviewed told us that their 

negotiations with card networks have been unsuccessful because they 

need to accept Visa and MasterCard cards to retain their customers and 

thus have to pay whatever prices Visa and MasterCard charge. Two of the 

small merchants we interviewed told us that they were unaware that such 

negotiations were possible. Some merchants and others have argued that 

allowing collective bargaining could result in a fairer interchange fee 

system because card networks would have less ability to set different rates 

for merchants based on industry type, volume of sales, and other factors; 

collective bargaining could result in one rate for all merchants. 

However, as mentioned previously, any option that decreases interchange 

fees may have opposing effects on different stakeholders (for example, 

decreased costs but decreased credit availability for merchants or lower 

prices but higher fees for cardholders). If negotiations resulted in lower 

interchange fees for merchants, then merchants could pass these savings 

to consumers through lower prices. However, given that representatives of 

issuers and card networks told us that issuers would likely respond to 

decreased interchange revenues by increasing annual fees, decreasing the 

value of rewards points, and possibly increasing interest rates and 

decreasing available credit, cardholders could be harmed. 

In addition, it could be difficult to ensure that small issuers and small 

merchants benefited from collective negotiations. Representatives of small 

issuers said that small issuers would not have sufficient market power to 

negotiate favorable interchange fees with a group of merchants. 

Furthermore, several of these representatives said they were concerned 

that merchants could come to agreements with large issuers under which 

the merchants would accept only the large issuers’ cards. Some merchants 

with whom we spoke were skeptical about the potential for small 

merchants to benefit from the collective negotiations with networks and 

issuers. One small merchant told us that her store would not be able to 

participate in such negotiations because of limited staff resources. 

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A significant legal barrier to implementing such negotiations is the need to 

obtain antitrust waivers, which DOJ has argued have been justified only in 

very rare instances in the United States. Credit card issuers and card 

network officials expressed concerns about removing antitrust 

exemptions that are designed to protect consumers from anticompetitive 

practices. In addition, DOJ officials have expressed their historical 

opposition to efforts to create exemptions to antitrust laws, stating that 

these exemptions should be used only in the rare instances in which a 

public policy objective compellingly outweighed free-market values. 

Furthermore, in response to a prior proposal that would have allowed for 

collective negotiations of interchange fees, DOJ officials expressed 

concern about the role that their agency would play in such negotiations. 

Page 63 GAO-10-45 Credit Card Interchange Fees
Appendix III: GAO

A

 Contact and Staff 

cknowledgments 

Page 64 GAO-10-45 

Appendix III: GAO Contact and Staff 

Acknowledgments 

Alicia Puente Cackley. 202-512-8678 or cackleya@gao.gov

Cody Goebel, Assistant Director; Michael Aksman; Jessica Bryant-Bertail; 

Rudy Chatlos; Katherine Bittinger Eikel; Christine Houle; Nathan 

Gottfried; Yesook Merrill; Marc Molino; Rachel Munn; Barbara Roesmann; 

Paul Thompson; and C. Patrick Washington made key contributions to this 

report. 

 Credit Card Interchange Fees 

GAO Contact 

Staff 

Acknowledgments 

(250468) 
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