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Why GAO Did This Study Federal entities—agencies, corporations, and others—are growing users of credit and debit cards, as both “merchants” (receiving payments) and purchasers. Merchants accepting cards incur fees—called merchant discount fees—paid to banks to process the transactions. For Visa and MasterCard transactions, a large portion of these fees— referred to as interchange—goes to the card-issuing banks. Some countries have acted to limit these fees. GAO was asked to examine (1) the benefits and costs associated with federal entities’ acceptance of cards, (2) the effects of other countries’ actions to limit interchange fees, and (3) the impact on federal entities of using cards to make purchases. Among other things, GAO analyzed fee data and information on the impact of accepting and using cards from the Department of the Treasury (Treasury) and the General Services Administration, reviewed literature, and interviewed officials of major card companies and three foreign governments.
Federal Reserve System, The 2007 Federal Reserve Payments Study: Noncash Payment Trends in the United States: 2003-2006 (Dec. 10, 2007).
Interchange rates are typically a percentage of the payment amount plus a fixed fee per transaction (for example, $0.05 or $0.10). In some cases, the interchange rate may be a flat rate per transaction (for example, $0.75).
4 Both Visa and MasterCard developed as membership organizations consisting of banks that participated in their respective payment systems. Because of this structure, traditionally they were referred to as credit card associations. MasterCard restructured to become a publicly held corporation, making its initial public offering of certain classes of stock in March 2006. Similarly, Visa became public, initiating its initial public offering during March 2008. For purposes of this report, we refer to Visa and MasterCard as card networks. The default interchange rates apply when there are no other interchange fee arrangements in place between an issuer and an acquirer. 5 Merchants Payments Coalition, Inc. This estimate was calculated using 2006 estimates of a 1.9 percent combined (MasterCard and Visa) average interchange rate and a combined purchase volume of approximately $1.9 trillion.
The cards that government entities use typically are charge cards in which the entire bill must be paid at the end of the billing period, and typically there is no interest.
Unlike what is done with most merchants, the interchange and other fees paid by FMS on behalf of the federal entities for which it processes card transactions that would constitute the merchant discount fee are not “discounted” from the amount of the card payment. Instead, FMS settles card transactions “at par,” and all costs associated with card acceptance are paid separately. For convenience, we use the term “merchant discount fee” throughout this report to refer to the card acceptance fees paid by FMS.
NAFIs generally are operated with the proceeds of their activities, rather than with appropriated funds. While these entities do not receive appropriated funds, we included them in our study because they are associated with governmental entities and, to some extent, are controlled by and operated for the benefit of those entities.
The federal entities that had high volumes of card acceptance were the Defense Commissary Agency, U.S. Mint, and the Department of Interior’s National Park Service. The federal entities that had low volumes of card acceptance were the Corporation for National and Community Service and the National Endowment for the Arts.
interchange rates, we judgmentally selected three countries—Australia, Israel, and Mexico—that adopted diverse approaches and whose efforts had been under way for sufficient time to allow for study. To obtain more detailed information, we conducted literature reviews and interviewed regulators and officials in the three countries. To determine the impact on federal entities of using cards to make purchases, we reviewed policies and procedures developed for the GSA SmartPay program, collected and analyzed data on card use from GSA, and reviewed our prior reports. Finally, we interviewed officials from five entities that were among those with the highest volume of card use in fiscal year 2006 and officials from the bank whose total government card spending was the highest.12 We conducted this performance audit from June 2007 to May 2008 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.
The federal entities that had a high volume of card use were the Department of Agriculture, Department of the Army, Department of Homeland Security, Department of Veterans Affairs, and the U.S. Postal Service. 13 The fiscal year 2005 through fiscal year 2007 dollar values on the costs and revenues associated with card acceptance are current values and have not been adjusted for inflation.
Control Branch did not directly address our recommendation, but agreed that the agency’s revenue collection review program—which will evaluate the use of credit and debit cards along with other processes—will help improve overall financial management at federal agencies.
Unlike private sector entities that pay for these services on their own and can adjust the prices of their goods and services to cover the costs of card acceptance, some federal entities cannot adjust the pricing of their goods and services. For example, the amounts of some U.S. court fees are specified in statute (28 U.S.C. §§1914(a) [Federal Court fee to be paid by party instituting civil proceedings]); similarly, the authorizing statute for the Defense Commissary Agency—which operates grocery stores for military service members and their families—provides that the prices can only be assessed a 5 percent surcharge on top of the cost of the goods. See 10 U.S.C. § 2484(d).
and/or MasterCard to provide card payment-processing services.15 The merchant contract specifies the level of services the merchant desires, as well as the merchant discount fee and other fees that will apply to the processing of the merchant’s card transactions. To provide card acceptance services to federal entities that participate in the Card Acquiring Service, FMS enters into an agreement with a financial institution that has been designated as a financial agent of the U.S. government to provide acquiring banking services. The agreement specifies the services to be provided to FMS and the federal entities that participate in the Card Acquiring Service.16 Visa and MasterCard establish and enforce rules and standards that may apply to merchants who choose to accept their cards. According to officials of the card networks, however, the networks are not involved in the relationship between a merchant and its acquiring bank.
In some instances, acquiring banks may contract with third-party entities to provide the card-processing services. In these instances, the third-party entities handle merchant services on behalf of the acquiring bank and may function as a sales agent for an acquirer. A merchant typically establishes a relationship directly with American Express if it wishes to accept this type of card. To accept a Discover card, a merchant may enter into a relationship directly with Discover, or it may enter into a relationship with an acquirer or third-party card processor that has a relationship with Discover. 16 FMS currently has only one designated financial agent that provides acquiring banking services for the Card Acquiring Service; prior to August 2006, FMS had two designated financial agents that provided acquiring banking services.
of the four parties in a typical credit card transaction and how fees are transferred among the parties.17 The figure shows that 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 bank, which receives $1.70 in interchange fees, and the acquiring bank, which receives $0.50 for processing the transaction.
PIN debit and signature debit transactions—in which a cardholder signs a receipt or an electronic screen to authorize the transaction—are processed in a similar manner. In a PIN debit transaction, however, the transaction is routed through the electronic funds transfer network to which the cardholder’s depository institution is a member, rather than the Visa or MasterCard network. The transfer of fees associated with both PIN debit and signature debit transactions is the same as a credit card transaction.
Sources: GAO (analysis); Art Explosion (images).
Note: This is an illustrative example for a typical merchant. The method in which fees are transferred for a federal government entity may differ. For example, for FMS, the interchange and other fees that would constitute the merchant discount fee are not “discounted” from the amount of the card payment. Instead, FMS settles card transactions “at par,” and all costs associated with card acceptance are paid separately.
In the United States, American Express has licensed a number of banks 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 card-issuing agreements with financial institutions. For transactions that occur on Discover cards issued by these third-party issuers, Discover receives interchange fees from the acquiring bank and also pays the card issuer an interchange fee.
Type of card—Different interchange rates apply to different types of card products. For example, both MasterCard and Visa have separate interchange rates for general purpose consumer credit cards, reward credit cards, commercial credit cards (issued to businesses), and debit cards. The rates vary because the costs, risks, and revenues associated with these different card products vary for issuers; they also reflect the networks’ goal of providing incentives for both issuance and acceptance of cards. For example, reward cards involve higher interchange fees for a number of reasons: According to network officials, such cards tend to provide greater benefits to merchants (in the form of average transaction amounts that are typically higher than those on standard cards) and to cardholders (in the form of cash rebates or points).
Merchant size (transaction volume)—Both MasterCard and Visa set lower interchange rates for merchants in some categories that conduct high volumes of card transactions over their networks. For example, according to Visa’s default interchange rates that were in effect as of October 2007, supermarkets that conducted a minimum of about 7 million Visa card transactions in calendar year 2006 qualified for lower rates than supermarkets that conducted fewer Visa transactions.
Mode in which a transaction is processed—Interchange rates also differ depending on how a card transaction is processed. For example, transactions that occur without a card being physically present, such as in Internet transactions, carry a greater risk of fraud; therefore, higher interchange rates apply to these transactions. Similarly, swiping a card through a card terminal, rather than key-entering the account number, provides more information to the issuing bank to verify the validity of a transaction; therefore, swipe transactions are assessed a lower interchange rate.
Pub. L. No. 90-321, Title I, 82 Stat. 146 (1968) (codified as amended at 15 U.S.C. §§ 16011666). See GAO, 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).
H.R. 5546, 110th Cong. (2008).
S.B. 1138, 213th Leg. (NJ 2008); H.B. 3321 51st Leg., 2d Sess. (OK 2008).
See, e.g., H.B. 2856, 82nd Leg. (KS 2008).
call on Congress to assess the impact on merchants of interchange fees and other discount fees and to require credit card issuers to be more open with merchants about the costs of the payment systems in which they participate.24 As of March 2008, none of the initiatives had been enacted into law. Interchange fees also have been a factor in lawsuits alleging violations of the antitrust laws by credit card networks and related parties.25 The plaintiffs in those cases alleged that interchange fees were an example of the networks’ unlawful exercise of market power. As of October 2005, merchants had instituted at least 14 class action lawsuits in four separate districts against Visa and MasterCard and their member banks, alleging specifically that the defendants fixed interchange fees at supracompetitive levels in violation of Section One of the Sherman Antitrust Act.26 Currently, in a consolidated action pending in the United States District Court for the Eastern District of New York, merchants claim that interchange fees have an anticompetitive effect in violation of the federal antitrust laws.27 Appendix II provides additional information on cases that include, among other things, allegations that interchange rates were a function of anticompetitive conduct in violation of antitrust laws.
Under GSA’s SmartPay program, GSA negotiates master contracts with banks to issue cards to federal entities that participate in the program. The first SmartPay master contracts were established in 1998 with five banks.
Sen. J. Mem. Res. 8020, 60th First Reg. Sess. (WA 2007); H.J.R. 53 (VT. 2008).
15 U.S.C. §§ 1 – 7.
In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, 398 F. Supp.2d 1356 (MDL Oct. 19, 2005). According to the Magistrate Judge assigned to the case, as of February 2006 “some forty class action lawsuits” had been brought “on behalf of a class of merchants against the defendant credit card networks and certain of their member banks.” In 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.) As of March 2008, the action remained in pretrial proceedings.
These contracts are set to expire in November 2008 and will be replaced by new master contracts with four issuing banks under GSA’s SmartPay 2 program. Participating federal entities choose a bank from among those under contract with GSA that offer services that meet their needs, and develop individual task orders that specify the products and services that the banks will provide them. In negotiating their individual task orders, these federal entities also can specify to the issuing banks other services they may need to operate their card programs. For example, banks can provide tools that the federal entities use to monitor card usage and expenses, or customer service support, such as 24-hour emergency card service for federal employees.
Federal entities realize benefits from accepting credit and debit cards, including increased customer satisfaction, fewer bad checks and cash thefts, and improved operational efficiency. Realizing these benefits entails costs, principally the merchant discount fees associated with card transactions but also the costs for related equipment needed to process the transactions. In fiscal year 2007, federal entities from which we collected data reported paying $433 million dollars in merchant discount fees for the processing of over $27 billion in credit and debit card revenues. As card acceptance has become more common, federal entities have worked to control the associated fees, including reviewing the ways in which transactions are processed to ensure they qualify for the lowest possible interchange rates. Additionally, FMS began a pilot program in which it is reviewing the revenue collection mechanisms of the federal entities for which it provides services, with the aim of identifying cost savings and efficiencies. FMS has reviewed collection cash flows for eight federal entities thus far and has identified cost-savings opportunities. While it plans to conduct over 100 more reviews, it has not yet developed a full implementation strategy for the program. Such a strategy would help ensure that FMS achieves the program’s goals as expeditiously as possible and increase overall savings to the government.
28 David B. Humphrey and Allen N. Berger. 1990. “Market Failure and Resource Use: Economic Incentives to Use Different Payment Instruments.” In The U.S. Payment System: Efficiency, Risk and the Role of the Federal Reserve: Proceedings of a Symposium on the U.S. Payment System Sponsored by the Federal Reserve Bank of Richmond, ed. David B. Humphrey, pp. 45-86. Boston: Kluwer Academic Publishers. D. D. Garcia-Swartz, R. W. Hahn, and A. Layne-Farrar, “The Move Toward a Cashless Society: Calculating the Costs and Benefits,” Review of Network Economics, vol. 5, no. 2 (2006). D. Humphrey, M. Willesson, T. Lindblom, and G. Bergendahl, “What Does It Cost to Make a Payment,” Review of Network Economics, vol. 2, no. 2, (2003).
U.S. Postal Service and Amtrak Total Source: GAO analysis of federal entity data.
We use the term “merchant discount fee” throughout this report to refer to the card acceptance fees paid by federal entities. For FMS, the merchant discount fees are not “discounted” from the amount of the card payment. Instead, FMS settles card transactions “at par,” and all costs associated with card acceptance are paid separately.
29 Not all entities from which we collected data operate on the federal fiscal year of October 1 through September 30; therefore, the data presented for fiscal years represent some costs associated with dates that fall outside of the federal fiscal year.
This estimate for interchange fees paid includes fees associated with PIN debit transactions as well as MasterCard and Visa credit and signature debit transactions. We were not able to determine the portion of the PIN debit interchange fees that were specifically paid for Visa and MasterCard PIN debit transactions. It is possible that some of the PIN debit transactions reported by these entities were routed through other debit networks and, therefore, are not necessarily Visa and MasterCard transactions. Also, some federal entities included quarterly fees paid to Visa and MasterCard in the interchange fees figures they reported; therefore, our estimated interchange fee amount includes these fees.
31 We did not include such transactions in compiling the total merchant discount fees paid by federal entities for card acceptance. Instead, we provide this information as an example of additional fees that are paid by consumers for card acceptance associated with government payments. 32 This fee also applies to debit card payments in which the taxpayer does not enter a PIN to authorize the transaction. Beginning in the 2008 tax season, both third-party entities will have implemented PIN-less debit capabilities in which a customer’s card number will be recognized as a debit card and routed through the appropriate card network for a flat fee of $2.95.
these additional costs were not significant compared to merchant discount fees.
This category is referred to as Public Sector for MasterCard and Customer Payment Service Retail 2 (Emerging Markets) for Visa.
Different interchange rates may apply when a commercial card is presented for payment at a federal entity.
rates associated with PIN debit transactions justified the investment. An FMS official stated that the only entity for which it processes card transactions that currently has the ability to accept PIN debit cards is DeCA; however, as entities undergo equipment upgrades, FMS works with them to identify equipment that may lower overall collection costs. For example, one federal entity is in the process of developing a new terminal system for card collections, and as part of this process, FMS is encouraging the entity to implement a system that has the capability to process PIN debit transactions. Additionally, some of the military NAFIs with which we spoke adopted technologies necessary to accept PIN debit cards, stating that they too recognized the cost savings associated with these transactions. Federal entities also can reduce card acceptance fees by changing the way in which they or their acquiring banks connect to various card networks. For example, Postal Service officials explained that they were in the process of converting to a new method of processing transactions called a payment switch, which will funnel all of the information from the Postal Service’s 70,000 terminals into one settlement file at the end of the day. The file then is sent to a third-party card processor. The officials explained that the payment switch will reduce substantially the processing fee component of card payment costs, because the technology in the payment switch allows for routing each transaction to the lowest cost processor. Additionally, the payment switch will enable the Postal Service to send some card transactions directly to a card company rather than through the third-party processor, reducing the cost of accepting those transactions. FMS’s current acquiring bank has also implemented changes in the method by which it processes PIN debit card transactions. FMS officials explained that the bank identified a method for routing PIN debit card transactions to different networks so that the costs for processing the transaction are minimized, resulting in annual savings of almost $300,000 for FMS.
FMS officials told us that they tried to negotiate lower interchange rates with both Visa and MasterCard by stating that some factors that are included in determining interchange rates do not necessarily apply to federal government transactions. For example, FMS officials argued that the federal entities that participate in the Card Acquiring Service pose less risk than other merchant types and that there is no risk of delinquency on the part of the Treasury. FMS officials stated that their negotiations were not successful and that they were not able to negotiate lower interchange rates.
Officials from the Postal Service also explained their attempts to negotiate with the card networks. They stated that they believe lower interchange rates should be applied to their transactions for a variety of reasons. First, the Postal Service estimates that it is one of the top U.S. merchants in terms of card transaction volume. Second, there is less risk of fraud than some other merchants because most transactions are conducted face to face. Third, the Postal Service operates a large retail network with 35,000 offices, self-service terminals, mail and phone orders, plus a Web site that receives approximately 30 million hits per month and provides a great amount of visibility for the networks. Fourth, the Postal Service has its own law enforcement agency that investigates instances of fraud, including fraudulent use of cards where merchandise travels through the mail. These investigations result in the recovery of merchandise as well as stolen card data and in some cases the arrest of international criminals to the benefit of the credit card industry. They noted that the benefit of such a service to the card networks was not reflected in the interchange rates applicable to Postal Service transactions. The officials did state that they have had some limited success in negotiations with the card networks resulting in some small cost savings.
marketing program. The funds could be used to reduce interchange costs and/or for additional marketing efforts; however, the details of the negotiations are bound by confidentiality agreements and are considered proprietary information. The officials explained that negotiations of this type are not typical of federal entities because of the limited marketing opportunities available to most government entities. Although some federal entities have had some success in negotiating lower interchange rates for their transactions, whether additional opportunities exist for further reductions in interchange rates is unclear. According to officials of MasterCard and Visa, among the factors that are considered when setting interchange rates is whether the industry or sector represents a new market for credit and debit cards. According to these officials, they see government payments as a market in which they hope to increase card acceptance and transaction volumes; thus, the interchange rates that Visa and MasterCard set for government transactions are lower than those of many other merchant categories. Additionally, officials at both MasterCard and Visa told us that opportunities exist for merchants, including federal entities, to negotiate for lower interchange rates assessed on their transactions. For example, the MasterCard officials explained an instance in which, in response to rapidly rising gasoline prices, they worked with gasoline merchants to develop a cap on the interchange fees that can be charged on petroleum purchases. Officials from both networks explained that they have individuals dedicated to developing customized arrangements with merchants and that these negotiations involve identifying mutually beneficial arrangements for both the merchant and the network. Also, we found it difficult to assess whether federal entities could negotiate rate reductions based on their relative transaction volume or aggregate card revenues, because we could not identify any publicly available data we could use to determine how the federal government’s total transaction volume or aggregate card revenues compare with those of other large merchants.
35 Pub. L. No. 98-369 § 2652, 31 U.S.C. § 3720; see also 31 C.F.R. Part 206 and Department of the Treasury, Financial Management Service, Cash Management Made Easy (Washington, D.C., 2002). These reviews examine and analyze agency management of the following programs: collections and deposits, disbursements, inventories, imprest funds (such as petty cash funds), and other cash held outside the Treasury. The federal entity and FMS agree on any recommendations from these reviews and on plans for improvement. 36 The automated clearinghouse is a processing and delivery system that provides for the distribution and settlement of electronic financial transactions. Debits and credits are cleared electronically, rather than through the physical movement of checks or cash.
The eight entities ranged from individual agencies or bureaus to entire federal departments, due to differences in the complexity of entities’ revenue streams. The entities that participated in the pilot included the Department of Agriculture—Forest Service, Department of Defense—Defense Commissary Agency, Department of Education—Federal Student Aid and Administrative Office; Department of Homeland Security—Customs and Border Protection; Department of Housing and Urban Development; Department of the Treasury—Internal Revenue Service; Department of Labor—Employment and Training Administration and Employment Standards Administration; and National Aeronautics and Space Administration.
commitment and timely attainment of its goals. For example, FMS officials told us they have not developed a timeline for completion of the reviews for all agencies because they are focused on the 24 CFO agencies. However, because this program will help FMS achieve its strategic goal of increasing the percentage of federal government revenues collected electronically—a percentage that has remained constant for the last 3 fiscal years—establishing a targeted timeline for completing the remaining reviews could help FMS ensure that it makes progress toward this goal. In addition, in its 2004 review, OMB noted that FMS lacked policies and techniques for convincing federal entities to eliminate paper-based collections. Including in its reviews estimates of the cost savings to be achieved by implementing the recommended changes could help FMS emphasize to the entities the importance of acting on the recommendations that it identifies. Finally, FMS has already found that reviews are taking more time to complete than it initially anticipated. The cost savings associated with implementing the efficiencies identified in the reviews are both immediate and recurring. Accordingly, as the pilot program is fully implemented, ensuring that it has adequate resources for completing the reviews expeditiously would help achieve the program’s goals.
Authorities in as many as 26 countries have taken or considered actions intended to either limit interchange fees or improve card payment systems. In the 3 countries we examined in more detail—Australia, Israel, and Mexico—reforms designed to effect reductions in interchange rates were undertaken as part of broader efforts to change payment systems or card markets; thus, isolating the effects of the interchange interventions is difficult. Further, differences regarding the regulatory and market structures between these countries and those of the United States make it difficult to estimate the effects of any similar actions in the United States.
According to information from regulators, card networks, and others, actions regarding card fees, issuer practices, or payment system functioning in general have been taken or considered in as many as 26 countries as well as the European Union in the last 18 years.39 These actions were described as, among other things, agreements between card networks or issuing banks and governmental authorities, as well as decisions by antitrust tribunals and commissions. For example, in December 2007 the European Commission issued a decision finding that MasterCard’s interchange fees for cross-border transactions in the European Economic Area violate European Community Treaty rules on restrictive business practices.40 In addition, the commission recently announced that it would conduct an inquiry into whether Visa’s interchange fees similarly violate the treaty rules.41 In some cases, the actions taken are under appeal in these jurisdictions. In reviewing information available from U.S. and foreign regulators, card networks, and other sources, we determined that Australia, Israel, and Mexico had taken actions affecting various parts of their card and payment system markets in recent years, including actions specifically addressing merchant discount or interchange fees. However, data on the impact of the actions taken in these three countries are limited. The following sections summarize the actions in the three countries.
IP/07/1959, Brussels, 19 December 2007.
MEMO/08/170, Brussels, 26 March 2008.
percent. RBA officials explained to us that because card users do not directly pay some of the costs of using cards, including interchange fees, consumers’ use of credit cards at the expense of other lower-cost payment methods, such as debit cards was inefficient for their economy as a whole. To help remedy this perceived inefficiency, RBA first attempted to encourage voluntary action on the part of the credit card industry. When these attempts were unsuccessful, RBA set a ceiling applicable to average credit card interchange rates, which took effect in 2003.42 RBA officials explained that to determine how to assess appropriate interchange rate levels, they worked with card networks to identify the range of costs incorporated in the calculation of interchange rates. After considering these costs, RBA officials decided that costs associated with transaction processing, fraud and fraud prevention, authorizing transactions, and financing the period between the time the merchant is paid and the time that the issuer receives payment should be covered by the interchange fees, while costs associated with credit losses should not be. To lower interchange rates from their then current levels, the central bank set a benchmark rate that excluded the disallowed costs, and required that the weighted average of the rates set by each four-party credit card system— which at that time included Visa, MasterCard, and a domestic card brand called Bankcard—not exceed that benchmark.43 RBA officials stated that they chose to use a cost-based method because it appeared to be a transparent and objective way to lower interchange rates. As a result of the reforms, the average interchange rate in the Visa and MasterCard networks declined from 0.95 percent to around 0.50 percent. In addition to the actions taken to limit credit card interchange fees, the central bank also took several other actions designed to promote efficiency and competition in the payment systems during the same period.
Bankcard was a domestic credit card that closed in the first half of 2007.
temporarily approved this agreement, it has stated that final approval cannot occur until an independent expert appointed by IAA determines that the agreement is consistent with the tribunal’s approved methodology for setting fees.
A basis point is equal to .01 percent or 1/100th of a percent.
single reference rate to account for differences in merchant type, resulting in 22 different merchant categories, most of them with different applicable interchange rates. The association and the central bank continue to work together to refine this method. As of January 2008, the effective reference interchange rate for credit cards was lowered to 1.61 percent.
value of credit card transactions.45 The Mexican central bank reports that the number of credit and debit card payments increased significantly in the last few years. In addition, several new banks have entered the issuing and acquiring markets and concentration in these markets has decreased, although both markets still continue to be relatively concentrated compared to that of the United States. In Israel, IAA officials told us that too little time has passed to evaluate the effects of their reforms; however, they expect that the creation of a single interchange system will yield efficiency gains and promote competition for the benefit of consumers.
In Australia, until recently American Express cards were issued exclusively by American Express in a proprietary model similar to that in the United States.
163 F. Supp. 2d at 340; see 244 F. 3d at 239-40.
In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, 398 F. Supp.2d 1356 (E.D. NY Oct. 19, 2005).
Many federal entities use cards to make purchases of goods and services needed for their operations, spending more than $27 billion on purchase, travel, and fleet cards in fiscal year 2007.51 Officials we interviewed from five federal entities that were high-volume users of cards for goods, travel, and automotive expenses told us that using cards reduces their administrative expenses, provides income from the rebates they receive from the issuing banks, and provides other benefits. Although generally citing few drawbacks to the use of charge cards, federal entity officials acknowledged challenges in controlling use of cards, but also noted that the data available on card use and tools provided by the issuing banks help them address these challenges.
Fleet cards are used for fuel and supplies for government vehicles.
Although federal entities pay no direct costs to issuing banks for the general use of cards, some products and services, such as traveler’s checks, do entail fees.
Fiscal year Spending Transactions Source: GAO analysis of GSA data.
Note: Spending amounts adjusted for inflation to constant 2007 dollars.
According to the Director of GSA’s Office of Charge Card Management, the increases in spending and the number of transactions in the early years of the SmartPay program were due to entities adjusting their purchasing behaviors from previously used systems, such as purchase orders, and learning how to use their cards to make additional purchases. Although the number of transactions remained roughly constant between fiscal years 2002 and 2007, the average transaction value rose from about $240 to about $300, accounting for the growth in total spending during this time. According to the Director, the number of transactions has remained relatively stable in current years because, for the most part, entities have transitioned from most of their previously used purchasing systems and are now making only small changes to their programs to improve efficiencies.
53 A prepaid card is one that is programmed to have a monetary value, and charges to that card cannot exceed the balance. Contactless cards store data on a microchip embedded in the card, which can be read by passing the card in front of a special card reader.
U.S. Army Audit Agency, “Savings from Acquisition Reform” Audit Report: AA 97-58 (Alexandria, Virginia: Jan. 7, 1997).
Fiscal year Source: GAO analysis of GSA data.
Note: Rebate amounts adjusted for inflation to 2007 constant dollars.
57 GSA receives 4 of the basis points, termed the Industrial Funding Fee. This fee totaled approximately $9 million in fiscal year 2007 and is used by GSA to administer the SmartPay program as well as one other GSA program.
income for the entity, and one other allocates rebates to a working capital fund for initiatives of general benefit to the entity. Officials from federal entities also cited several other benefits associated with using cards to make purchases. For example, officials from several entities told us that the increased data on purchases that is available to them by using charge cards allows for better management and/or tracking of spending. According to officials at the Department of Agriculture, purchase card data allowed them to examine their purchasing patterns and identify opportunities for savings. They explained that by using purchase cards to buy office supplies, they received data on the transactions, which they used to negotiate a contract with a vendor to buy supplies in bulk that resulted in millions of dollars in savings per year.58 Officials from several entities also told us that cards allow them to make purchases more quickly and/or more conveniently than previously used methods of purchasing. For example, officials from one entity told us that once the approval process is completed for a particular purchase, it can be made immediately, whereas previously used methods take a longer time to complete. According to officials from another entity, the ability to obtain cash advances on cards benefits them because it eliminates the need for imprest funds, which, according to officials from a different entity, are harder to monitor for fraud. Other benefits cited by officials from one entity included compensating vendors doing business with the government more quickly and greater ability to resolve disputes with vendors because charges can be reversed until the dispute is resolved.
58 We have previously reported that the use of purchase cards presents an opportunity for entities to negotiate discounts from major purchase card vendors, but agencies generally have not seized those opportunities. See GAO, Contract Management: Agencies Can Achieve Significant Savings on Purchase Card Buys, GAO-04-430 (Washington, D.C.: Mar. 12, 2004).
GAO, Governmentwide Purchase Cards: Actions Needed to Strengthen Internal Controls to Reduce Fraudulent, Improper, and Abusive Purchases, GAO-08-333 (Washington D.C.: Mar. 14, 2008).
are not used; requiring charge card transaction or statement reconciliation on the part of the cardholder in a timely manner; ensuring managerial review of charge card purchases; and implementing policies outlining appropriate administrative and/or disciplinary actions for charge card misuse. Finally, officials from some of the federal entities we interviewed told us that the tools and data provided by their card-issuing banks helped them to limit the risk of misuse of cards by enabling them to track and limit the types of purchases made on the cards. For example, some entities block the use of cards at certain merchant types, to help ensure that the cards are used only for approved goods and services, or limit transaction amounts, cash withdrawals, and other activities. Officials from several entities noted that the data on card transactions they receive from their issuing bank allow them to monitor for potentially fraudulent or inappropriate transactions. For example, an official from one entity told us that the data allowed it to identify suspicious transactions based on specified dollar amounts, charges to certain vendors, and other types of transactions that could involve misuse. Officials from another entity noted that security features on cards help identify suspect charges by generating alerts for questionable transactions and by sending an e-mail to the cardholder every time a transaction occurs on his or her account in order to verify whether the transaction was approved by the cardholder.
manage their card activities and potentially reduces costs for the government.
In order to help expeditiously achieve savings to the government, including those associated with accepting cards, we recommend that the Secretary of the Treasury take steps to establish a full implementation strategy for FMS’s revenue collection review program. Such a strategy should include a timeline for completing the reviews, cost savings estimates associated with individual reviews, and an assessment of the adequacy of the resources committed to the program.
We requested comments on a draft of this report from the Treasury and GSA. In an e-mail providing the Treasury’s comments, the manager of FMS’s Internal Control Branch noted that our report acknowledges that the acceptance of credit and debit cards has provided significant benefits to the agencies and the public, and that as agencies implement more ecommerce initiatives and interact more with the public through the Internet, credit and debit card acceptance is likely to continue to increase. While FMS did not directly address our recommendation, the manager agreed that FMS’s revenue collection review program, in which the acceptance of credit and debit cards is only one of many processes that will be evaluated, will help improve overall financial management at federal agencies. FMS also provided technical comments, which we have incorporated where appropriate. In addition, GSA reviewed a draft of this report and, in an e-mail from the Director, Internal Control and Audit Division, Office of the Controller, indicated agreement with the report’s contents regarding the SmartPay program.
We are sending copies of this report to various other interested congressional committees and members and to the Secretary of the Treasury; the Administrator, General Services Administration; and other interested parties. We will also provide copies to others on request. This report will also be available at no charge on GAO’s Web site http://www.gao.gov.
The federal entities that had high volumes of card acceptance were the Defense Commissary Agency, U.S. Mint, and the Department of the Interior’s National Park Service. The federal entities that had low volumes of card acceptance were the Corporation for National and Community Service and the National Endowment for the Arts.
total amount of merchant discount fees (for processing fees as well as interchange fees) assessed on card transactions. Only three entities—Amtrak, FMS, and the Postal Service—were able to separately identify the amounts they paid in interchange fees. For the other entities, we obtained the total amounts paid in merchant discount fees. The data we collected on the costs associated with card acceptance from the federal entities were the best data available; however, because of limitations in and differences among the record keeping of the entities, the data may not be complete for all years, may treat some costs inconsistently, and in one case contain estimated, rather than actual, values. For example, not all entities could provide us with complete data for all 3 fiscal years, and some entities treated certain costs inconsistently, such as including cost information for chargeback fees in their merchant discount fee data.2 In another case, a federal entity used data from other time periods to estimate some of the pieces of information we requested. We reviewed these data for completeness and accuracy and determined that none of the limitations materially affect the findings we report. However, due to these limitations, the actual figures presented are best viewed as approximations, or estimates in some cases, rather than precise figures. The dollar values for this objective are reported as current dollars. In addition to analyzing data from federal entities on the revenues and costs associated with card acceptance, we also reviewed some federal entities’ contracts or agreements with acquiring banks. To determine the interchange fees applicable to the federal entities’ card transactions, as well as the factors that cause interchange fees to vary, we reviewed MasterCard and Visa interchange rate schedules effective beginning October 2007 and April 2008. We also reviewed historical interchange rate schedules for rates that were effective August 2003 through April 2007 that were provided by an acquiring bank. Additionally, we interviewed government officials responsible for settling card transactions, and officials from American Express Company, Discover Financial Services, MasterCard Incorporated, Visa Inc., and Fifth Third Bancorp—FMS’s current acquiring bank—to gather information on how government entities’ card acceptance fees are assessed and steps being taken to manage the fees.
A chargeback fee is any disputed credit or signature debit sale that is returned to an acquiring entity for reimbursement of the cardholder’s account.
Based on U.S. Department of Commerce, Bureau of Economic Analysis, National Income and Product Accounts, table 1.1.4, last revised Jan 30, 2008.
which accounted for the highest government card spending in fiscal year 2006, and one academic researcher with extensive work on government use of cards. We conducted this performance audit from June 2007 to May 2008 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.
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).
Pending Class Action—U. S. District Court (E.D.N.Y.) In a class action pending in the United States District Court for the Eastern District of New York, merchants claim that interchange fees have an anticompetitive effect in violation of the federal antitrust laws.4 This case is a consolidation of numerous separate actions. As of October 2005, merchants had instituted 14 class action lawsuits in four separate districts against Visa and MasterCard and their member banks. According to the Magistrate Judge assigned to the consolidated case, as of February 2006 “some forty class action lawsuits” had been brought “on behalf of a class of merchants against the defendant credit card networks and certain of their member banks.”5 Kendall decision In March 2008, the Federal Court of Appeals for the Ninth Circuit upheld the District Court’s dismissal of a claim in which merchants alleged that the merchant discount fees set by Visa, MasterCard, Bank of America, Wells Fargo Bank, and U.S. Bank violated Section 1 of the Sherman Act,15 U.S.C. § 1, and Section 16 of the Clayton Act, 15 U.S.C. § 26.6 The court ruled that the plaintiffs failed to plead evidentiary facts necessary to support such a claim. Specifically, the court found that the merchants failed to allege facts necessary to support their theory that the banks conspired or agreed with each other or with Visa and MasterCard to restrain trade. With respect to the allegations against the banks, the court observed that “merely charging, adopting or following the fees set by a Consortium is insufficient as a matter of law to constitute a violation of Section 1 of the Sherman Act.” Further, the court concluded that the interchange fee set by Visa and MasterCard was not imposed directly upon the merchants as an anticompetitive measure but instead constituted a cost imposed on the banks which the banks passed on to the merchants as a rational business decision.
Kendall v. Visa U.S.A., Inc., 518 F.3d 1042 (9th Cir. 2008).
In addition to the individual named above, Dave Wood, Director; Cody Goebel, Assistant Director; Rudy Chatlos; Isidro Gomez; Christine Houle; Christopher Krzeminski; Marc Molino; Paul Thompson; Ann Marie Udale; and Ethan Wozniak made key contributions to this report.

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