Credit and Debit Cards
Federal Entities Are Taking Actions to Limit Their Interchange Fees, but Additional Revenue Collection Cost Savings May Exist Gao ID: GAO-08-558 May 15, 2008Federal 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.
By accepting cards, federal entities realize benefits, including more satisfied customers, fewer bad checks and cash thefts, and improved operational efficiency. In fiscal year 2007, federal entities accepted cards for over $27 billion in revenues and paid at least $433 million in associated merchant discount fees. For those able to separately identify interchange costs, these entities collected $18.6 billion in card revenues and paid $205 million in interchange fees. Federal entities are taking steps to control card acceptance costs, including reviewing transactions to ensure that the lowest interchange rates--which can vary by merchant category, type of card used, and other factors--are assessed. While the Visa and MasterCard card networks have established lower interchange rates for many government transactions, some federal entities have attempted to negotiate lower ones, with mixed success. To identify savings from cards and other collection mechanisms, Treasury's Financial Management Service (FMS)--which handles revenues and pays merchant discount fees for many federal entities--initiated a program in 2007 to review each entity's overall revenue collections. FMS has identified potential efficiency and cost saving improvements at the eight entities it has reviewed thus far, but has yet to develop a full implementation strategy-- including a timeline for completing all reviews, cost savings estimates, and resource assessment--that could help expeditiously achieve program goals. Several countries have taken steps to lower interchange rates, but information on their effects is limited. Among the three countries GAO examined, regulators in Australia and Israel intervened directly to establish limits on interchange rates, while Mexico's banking association voluntarily lowered some rates. Since Australia's regulators acted in 2003, total merchant discount fees paid by merchants have declined, but no conclusive evidence exists that lower interchange fees led merchants to reduce retail prices for goods; further, some costs for card users, such as annual and other fees, have increased. Few data exist on the impact of the actions taken in Mexico (beginning in 2004) and Israel (beginning in the late 1990s). Because of the limited data on effects, and because the structure and regulation of credit and debit card markets in these countries differ from those in the United States, estimating the impact of taking similar actions in the United States is difficult. Federal officials cited various benefits from card use--which totaled more than $27 billion in fiscal year 2007, a 51 percent increase since fiscal year 1999 after adjusting for inflation--including the ability to make purchases more quickly and with lower administrative costs than with previously used purchasing methods. The banks that issue cards to federal entities also rebate a small percentage of their card purchase amounts; these rebates totaled $175 million in fiscal year 2007. Preventing inappropriate card use poses challenges, and GAO and others have identified inadequate controls over various agencies' card programs. However, tools and data provided by the issuing banks now allow entities to review transactions more quickly, increasing their ability to detect suspicious transactions.
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Director: Team: Phone:GAO-08-558, Credit and Debit Cards: Federal Entities Are Taking Actions to Limit Their Interchange Fees, but Additional Revenue Collection Cost Savings May Exist
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Report to Congressional Requesters:
United States Government Accountability Office:
GAO:
May 2008:
Credit And Debit Cards:
Federal Entities Are Taking Actions to Limit Their Interchange Fees,
but Additional Revenue Collection Cost Savings May Exist:
Credit and Debit Cards:
GAO-08-558:
GAO Highlights:
Highlights of GAO-08-558, a report to congressional requesters.
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 inter-change fees, and (3)
the impact on federal entities of using cards to make purchases. Among
other things, GAO analyzed fee data and information on the impact of
accepting and using cards from the Department of the Treasury
(Treasury) and the General Services Administration, reviewed
literature, and interviewed officials of major card companies and three
foreign governments.
What GAO Found:
By accepting cards, federal entities realize benefits, including more
satisfied customers, fewer bad checks and cash thefts, and improved
operational efficiency. In fiscal year 2007, federal entities accepted
cards for over $27 billion in revenues and paid at least $433 million
in associated merchant discount fees. For those able to separately
identify interchange costs, these entities collected $18.6 billion in
card revenues and paid $205 million in interchange fees. Federal
entities are taking steps to control card acceptance costs, including
reviewing transactions to ensure that the lowest interchange
rates”which can vary by merchant category, type of card used, and other
factors”are assessed. While the Visa and MasterCard card networks have
established lower interchange rates for many government transactions,
some federal entities have attempted to negotiate lower ones, with
mixed success. To identify savings from cards and other collection
mechanisms, Treasury‘s Financial Management Service (FMS)”which handles
revenues and pays merchant discount fees for many federal
entities”initiated a program in 2007 to review each entity‘s overall
revenue collections. FMS has identified potential efficiency and cost
saving improvements at the eight entities it has reviewed thus far, but
has yet to develop a full implementation strategy”including a timeline
for completing all reviews, cost savings estimates, and resource
assessment”that could help expeditiously achieve program goals.
Several countries have taken steps to lower interchange rates, but
information on their effects is limited. Among the three countries GAO
examined, regulators in Australia and Israel intervened directly to
establish limits on interchange rates, while Mexico‘s banking
association voluntarily lowered some rates. Since Australia‘s
regulators acted in 2003, total merchant discount fees paid by
merchants have declined, but no conclusive evidence exists that lower
interchange fees led merchants to reduce retail prices for goods;
further, some costs for card users, such as annual and other fees, have
increased. Few data exist on the impact of the actions taken in Mexico
(beginning in 2004) and Israel (beginning in the late 1990s). Because
of the limited data on effects, and because the structure and
regulation of credit and debit card markets in these countries differ
from those in the United States, estimating the impact of taking
similar actions in the United States is difficult.
Federal officials cited various benefits from card use”which totaled
more than $27 billion in fiscal year 2007, a 51 percent increase since
fiscal year 1999 after adjusting for inflation”including the ability to
make purchases more quickly and with lower administrative costs than
with previously used purchasing methods. The banks that issue cards to
federal entities also rebate a small percentage of their card purchase
amounts; these rebates totaled $175 million in fiscal year 2007.
Preventing inappropriate card use poses challenges, and GAO and others
have identified inadequate controls over various agencies‘ card
programs. However, tools and data provided by the issuing banks now
allow entities to review transactions more quickly, increasing their
ability to detect suspicious transactions.
What GAO Recommends:
GAO recommends that the Board conduct a comprehensive evaluation of its
reform actions once these actions are fully implemented. GAO also
recommends that in the Board‘s ongoing deliberations regarding reforms
that have yet to be fully implemented, it develop mechanisms to
consider and respond to concerns of key stakeholders, develop a clear
policy regarding the selection and use of nonregents, and evaluate what
actions it can take in the event of neglect of duties by any of its
regents. The Board and the Smithsonian concurred with all of the
recommendations.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-632. For more
information, contact Mark Goldstein, (202) 512-2834, or
goldsteinm@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Federal Entities Are Taking Steps to Control Costs while Realizing the
Benefits Associated with Accepting Credit and Debit Cards:
Other Countries Have Acted to Influence Interchange Rates, but Limited
Information Is Available on the Effects of These Actions on Consumers:
Card Usage by Federal Entities Provides Numerous Benefits, but Creates
Control Challenges:
Conclusions:
Recommendation for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Summary of Major Federal Antitrust Actions Surrounding
Interchange Rates:
Appendix III: GAO Contact and Staff Acknowledgments:
Table:
Table 1: Credit and Debit Card Revenues Collected and Merchant Discount
Fees Paid by Federal Entities, Fiscal Years 2005-2007:
Figures:
Figure 1: Transfer of Fees in a Credit Card Transaction:
Figure 2: SmartPay Spending and Total Number of Transactions, Fiscal
Years 1999-2007:
Figure 3: Total Rebates Received from SmartPay Card Use, Fiscal Years
2002-2007:
Abbreviations:
CFO: Chief Financial Officer:
DeCA: Defense Commissary Agency:
DOJ: Department of Justice:
FMS: Financial Management Service:
FTC: Federal Trade Commission:
GDP: gross domestic product:
GSA: General Services Administration:
IAA: Israel Antitrust Authority:
IRS: Internal Revenue Service:
NAF: Inonappropriated fund instrumentality:
OMB: Office of Management and Budget:
PIN: personal identification number:
RBA: Reserve Bank of Australia:
TILA: Truth in Lending Act:
VA: Department of Veterans Affairs:
United States Government Accountability Office:
Washington, DC 20548:
May 15, 2008:
Congressional Requesters:
Consumers increasingly use credit and debit cards to make payments,
including those to federal, state, and local governments for such
things as park admission fees, driver licenses, and income taxes.
According to a federal banking regulator, 47 billion credit and debit
card transactions occurred in 2006, exceeding the approximately 31
billion check payments made that year.[Footnote 1] As with other forms
of payment, merchants and government entities incur various costs to
accept credit or debit cards. The majority of the costs associated with
accepting cards are the "merchant discount fees" paid to the banks that
merchants use to process their transactions. Generally, for each Visa
or MasterCard transaction, a portion of the merchant discount fee is
paid from the merchant's bank--called the acquiring bank--to the bank
that issued the card. This portion, called the interchange fee,
reimburses card issuers for a portion of the costs they incur in
providing card services.[Footnote 2] The balance of the merchant
discount fee is retained by the acquiring bank to cover its costs of
providing services. In addition to these fees, government entities that
accept cards also incur other, less significant costs to install and
maintain necessary equipment and to transmit card transaction data.
Interchange fee amounts are calculated using rates, typically between 1
and 2 percent of a purchase's value.[Footnote 3] The two largest card
networks (Visa and MasterCard) establish default interchange rates for
their respective systems.[Footnote 4] According to officials from one
card network, in establishing default interchange rates, the networks
take into consideration competitive factors of both card issuers and
merchants as well as certain costs that are associated with issuing and
accepting cards. Interchange rates vary according to a number of
factors, including the type of merchant accepting the card, the method
used to transmit the transaction information, and the type of card
used. For example, "reward" credit cards, which provide their holders
with cash rebates or points, typically have a higher interchange rate
than standard credit cards. That is, a merchant accepting a reward
credit card, depending on the merchant's agreement with its acquiring
bank, may pay a higher merchant discount fee for a purchase made with a
reward credit card. Additionally, if a cardholder uses a debit card and
enters a personal identification number (PIN), rather than signing a
receipt to authorize the transaction, the transaction generally poses
less risk to the card issuer, partly because the identity of the
cardholder is more certain and therefore the interchange rate is lower.
As the popularity of credit and debit cards for making purchases and
payments has grown, so has the amount of merchant discount fees paid by
the merchants--including federal government entities--that accept
cards. One source estimates more than $36 billion in interchange fees
was paid in 2006.[Footnote 5] These fees have been the subject of
litigation in the United States, but they are not federally regulated.
In some other countries, government authorities have taken steps to
limit the amounts of these fees.
In addition to accepting cards for payments, federal entities also use
cards to make purchases. The General Services Administration (GSA)
administers the SmartPay® program, which provides cards for federal
entities to purchase goods and services, including office supplies,
fuel for government vehicles, and airline tickets and hotel visits for
employees on official travel.[Footnote 6] GSA negotiates master
contracts with card-issuing banks on behalf of federal government
entities, which then negotiate agreements with the banks to specify
services and requirements for their card programs.
You asked us to review a number of issues concerning interchange fees,
including their effect on the federal government--as both an accepter
and a user of debit and credit cards--and actions other countries have
taken regarding these fees. This report examines (1) the benefits and
costs, including interchange fees, associated with federal entities'
acceptance of cards as payment for the sale of goods, services, and
revenue collection; (2) actions taken in countries that have regulated
or otherwise limited interchange fees and their impact; and (3) the
impact on federal entities of using cards to make purchases.
To examine the benefits and costs associated with acceptance of cards,
we analyzed data representing a broad a range of entities associated
with the federal government, including executive, legislative, and
judicial branch agencies; government corporations; and other federal
instrumentalities that accept credit and debit cards for
payment.[Footnote 7] Card transactions for the majority of executive,
judicial, and legislative branch agencies and federal commissions,
boards, and other entities are processed by the Department of the
Treasury's (Treasury) Financial Management Service (FMS), which pays
the associated fees for these entities. We reviewed data on the
merchant discount fees FMS paid from fiscal years 2005 through
2007.[Footnote 8] We also reviewed data from several federal entities
for which FMS does not settle transactions: Amtrak, the U.S. Postal
Service, and a number of Department of Defense and Department of
Homeland Security nonappropriated fund instrumentalities (NAFI), which
operate retail stores or recreational facilities for the
military.[Footnote 9] Among the entities included in our review,
Amtrak, FMS, and the Postal Service provided data specifically showing
the amount of interchange fees paid. For the other entities, we
obtained the total amounts paid in merchant discount fees.[Footnote 10]
The data we collected from 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. We reviewed the data for
completeness and accuracy and determined that none of these limitations
materially affect the findings we report. (For further information on
data sources, as well as a more detailed discussion of our objectives,
scope, and methodology, see app. I.) In addition, we reviewed Visa and
MasterCard interchange rate tables and met with officials from Visa,
MasterCard, American Express, and Discover to obtain information on how
these companies determine the rates charged to federal entities. We met
with federal entity officials responsible for settling card
transactions to identify factors that could affect the interchange
rates charged for the transactions. Further, we conducted
semistructured interviews with five federal entities for which FMS
processes card transactions, based on a selection of entities with the
highest and lowest volumes of card transactions.[Footnote 11] To report
on actions taken in countries where interchange rates have been limited
by regulation or other means and the effects of those actions, we
reviewed available literature, contacted our counterparts (other audit
institutions) in several countries, and interviewed officials of the
Federal Reserve Bank of Kansas City and industry officials to identify
various countries that had addressed interchange rates. To illustrate
differing approaches to limiting 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[Footnote 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.
Results in Brief:
Federal entities realize various benefits from accepting credit and
debit cards, but also incur various costs, including merchant discount
and interchange fees, which they are taking steps to control. Federal
entity officials told us that the benefits of accepting cards include
more satisfied customers, fewer bad checks and cash thefts, and
improved operational efficiency. In fiscal year 2007, federal entities
collected a total of over $27 billion in revenues through credit and
debit card transactions and reported paying at least $433 million in
merchant discount fees, which include the interchange fees associated
with Visa and MasterCard transactions.[Footnote 13] The three entities
able to separately identify interchange fees--FMS, Amtrak, and the
Postal Service--reported that in fiscal year 2007 those fees were about
$205 million, out of a total of about $218 million they paid in
merchant discount fees for Visa and MasterCard transactions. As card
acceptance has become more common, federal entities have worked to
control the associated fees. For example, while the card networks
already offer interchange rates for government transactions that are
lower than those for many other merchants' transactions, FMS requires
its acquiring bank to monitor how transactions are processed to ensure
that federal entities' transactions receive the lowest interchange
rates for which they are eligible. Some federal entities are working to
lower their card acceptance fees by installing equipment needed to
accept PIN debit cards, which generally have even lower interchange
rates. Also, some federal entities have attempted to negotiate with the
card networks to lower interchange rates applicable to their
transactions, with varying success. In addition to its efforts focused
on card acceptance, FMS initiated a program in 2007 to review the
overall efficiency of revenue collection mechanisms used by the federal
entities for which it provides services, with a goal of achieving cost
savings. As of March 2008, FMS had reviewed eight federal entities
under this program and identified potential cost savings and
efficiencies at each. Because FMS began this program as a pilot, it has
not developed a full implementation strategy. Such a strategy--
including a timeline for completing the reviews, estimates for cost
savings to be realized, and assessment of the adequacy of resources
committed--would help ensure attainment of program goals as
expeditiously as possible, as FMS expands the program to other federal
entities.
Several countries have taken steps intended to lower interchange rates
for a broad range of card transactions within their borders, but
complete information on the impact of these actions generally is not
available. Among the three countries we examined in more detail, public
authorities in Australia and Israel intervened directly to establish
limits on the rates that credit card issuers assess for interchange
fees on merchant transactions, while in Mexico the association of card-
issuing banks voluntarily lowered some interchange rates after a 2004
law gave the Mexican central bank the authority to regulate interchange
fees. Research on the impact of the regulation of interchange fees in
Australia in 2003 indicates that merchants have likely benefited, as
the total merchant discount fees they pay have decreased. However,
evidence suggests that the impact on cardholders in that country has
been mixed: Australian regulators have not been able to discern whether
merchants passed along any reduction in costs to consumers through
lower prices. However, issuing banks generally have reduced the rewards
offered on reward cards and increased annual and other card fees over
the last 5 years. Limited information indicates that merchant discount
rates have also declined in Mexico and Israel, but few data on the
impact of the actions taken have been published. As the result of
differences between the structure and regulation of the U.S. credit and
debit card markets and those of other countries, the potential for
similar actions to be taken in the United States and the possible
impact of such actions are uncertain. For example, the costs associated
with issuing cards may be different given the much larger number of
issuing banks in the United States than the other countries we studied.
Federal entities obtain numerous benefits when they use cards to make
purchases, but also face challenges in minimizing unauthorized or
fraudulent use. Card purchases by federal entities totaled more than
$27 billion in fiscal year 2007 (a 51 percent rise since fiscal year
1999 after adjusting for inflation), and card usage generally is
expected to continue to grow as entities expand the range of items and
services that they purchase with cards. For example, some entities have
begun using purchase cards to make payments on contracts. Federal
entity officials told us that using cards provides a variety of
benefits, including lower administrative costs when compared with the
slower, more labor-intensive purchasing methods that were previously
used. For example, GSA estimated that total administrative cost savings
from card use in fiscal year 2006 was $1.7 billion. Further, under the
SmartPay program, federal entities obtain rebates of a small percentage
of the card purchases that they make from the card-issuing banks; these
rebates totaled approximately $175 million in fiscal year 2007.
Officials stated that using cards also provides them with enhanced data
on purchasing trends, which can be used to negotiate better pricing
from vendors. Although receiving various benefits, federal entities
using cards to make purchases have had to implement controls and
procedures to prevent misuse. Implementing these controls can be
challenging; we and others have reported on some entities' inadequate
controls over their card programs that have resulted in instances of
fraud and abuse. However, officials from some federal entities told us
that the risk of fraud and abuse in card programs is less than or equal
to that under previously used purchasing methods. Further, some
officials told us that tools provided by the issuing banks allow for
faster managerial review of transactions and increased capabilities to
detect suspicious transactions.
In order to help expeditiously achieve savings to the government, this
report recommends 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. In commenting on a draft of this report, the
manager of FMS's Internal 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.
Background:
As consumers increasingly use credit and debit cards for purchases,
federal entities' acceptance of cards to pay for goods and services has
also increased. The Treasury's FMS performs the processing for card
transactions for executive, judicial, and legislative branch agencies,
as well as a number of governmental commissions, boards, and other
entities that choose to accept credit and debit cards as a method of
payment. Some other federal entities, such as the U.S. Postal Service
and Amtrak, operate their own credit and debit card-processing programs
and pay the associated fees for processing card transactions. FMS
operates the Credit and Debit Card Acquiring Service, a governmentwide
service that allows the federal entities for which it collects revenues
to accept Visa, MasterCard, American Express, and Discover credit
cards, as well as some types of debit cards. The volume of card
transactions that FMS processed increased by more than 30 percent from
fiscal year 2005 to fiscal year 2007. In fiscal year 2007, FMS
processed more than 65 million card payments made to federal entities.
FMS pays the fees associated with card acceptance for the federal
entities that participate in the Card Acquiring Service.[Footnote 14]
A merchant--including a government entity--that accepts MasterCard or
Visa credit and/or debit cards for payment of goods and services enters
into a contract with an acquiring bank that has a relationship with
Visa and/or MasterCard to provide card payment-processing
services.[Footnote 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.[Footnote 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.
Fees Allocate the Costs among Parties Associated with Card
Transactions:
Several parties are involved in a card transaction. For example, Visa
and MasterCard transactions involve (1) the bank that issued a
cardholder's card, (2) the cardholder, (3) the merchant that accepts
the cardholder's card, and (4) an acquiring bank. The acquiring bank
charges the merchant a merchant discount fee that is established
through negotiations between the merchant and the bank. A portion of
the merchant discount fee is generally paid from the acquiring bank to
the issuing bank in the form of an interchange fee to cover a portion
of the card issuer's costs to issue the card. The balance of the
merchant discount fee is retained by the acquiring bank to cover its
costs for processing the transaction. A merchant does not pay the
interchange fee directly; rather, the interchange fee portion of the
merchant discount fee is transferred from the acquiring bank to the
issuing bank. Because issuing banks incur costs to issue cards to
consumers, the interchange fee helps to allocate these costs among the
parties involved in card transactions. Figure 1 illustrates the roles
of each of the four parties in a typical credit card transaction and
how fees are transferred among the parties.[Footnote 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.
Figure 1: Transfer of Fees in a Credit Card Transaction:
This figure is a collection of illustrations placed together on a
flowchart to illustrate the transfer of fees in a credit card
transaction.
[See PDF for image]
Source: GAO (analysis); Art Explosion.
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.
[End of figure]
For American Express and Discover card transactions, generally only
three parties are involved: the consumer, the merchant, and one company
that acts as both the issuing and acquiring entities.[Footnote 18]
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. Because the
issuing and acquiring institution are the same, no interchange fee is
involved in the transaction. The merchant discount fees charged on
American Express and Discover transactions are, however, set to cover
some of the same types of costs that merchant discount fees (which
include interchange fees) cover for Visa and MasterCard transactions.
Officials of both the Visa and MasterCard networks told us that they
aim to set default interchange rates at a level that encourages banks
to issue their cards and merchants to accept those cards. According to
the network officials, the rates are set to recognize the value of card
acceptance and to reimburse issuing banks for some of the risks and
costs incurred in maintaining cardholder accounts, including lending
costs, such as the cost of funding the interest-free loan period, the
cost associated with cardholders that default on their loans, and
losses stemming from fraud. Officials with one of the card networks
noted that interchange fees help to reimburse issuers for bearing the
costs that merchants would otherwise have to bear for the ability to
make sales to customers on credit.
Both Visa and MasterCard develop and publish interchange rate tables
that disclose the default rates that apply to various types of
transactions. According to Visa and MasterCard officials, four main
factors determine interchange rates applicable to a given transaction:
* 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 category--The card networks classify merchants according to
the line of business in which they are engaged. Interchange rates may
reflect unique characteristics of different merchant categories, such
as average profit margins and the way in which merchants authorize
transactions. For example, according to card network officials, because
the supermarket industry tends to have very low profit margins, the
networks set interchange rates to encourage supermarkets to accept
cards. Also, the method in which a merchant authorizes payments can
affect the extent to which a card network's system is used. (For
example, hotels typically must authorize a payment at least twice--once
at guest check-in to ensure the customer is authorized for the minimum
payment amount, and again at checkout to authorize the final payment
amount.) Additionally, some merchant types may qualify for special
incentive interchange rates if a card network determines the merchant
category has growth potential for card acceptance. For example,
government organizations and utility providers receive lower
interchange rates to encourage them to accept cards.
* 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.
Interchange Fees Are Not Directly Regulated, but Are the Subject of
Legislative Initiatives and Litigation:
Interchange fees are not regulated at the federal level in the United
States. The Federal Reserve, under the Truth in Lending Act (TILA),
however, is responsible for creating and enforcing requirements
relating to the disclosure of terms and conditions of consumer credit,
including those applicable to credit cards.[Footnote 19] In addition,
the Federal Reserve and other federal agencies, including the Office of
the Comptroller of the Currency, the Federal Deposit Insurance
Corporation, the Office of Thrift Supervision, and the National Credit
Union Administration oversee credit card issuers. As part of their
oversight, these regulators review card issuers' compliance with TILA
and ensure that an institution's credit card operations do not pose a
threat to the institution's safety and soundness. The Federal Trade
Commission (FTC) generally has responsibility for enforcing TILA and
other consumer protection laws for credit card issuers that are not
depository institutions.
As of early 2008, interchange fees were the subject of federal and
state legislative proposals. For example, the Credit Card Fair Fee Act
of 2008, introduced in March 2008, would, according to one of the
bill's sponsors, establish a process by which merchants and issuing
banks could agree to set interchange fees and other terms of access to
covered electronic payments systems without violating federal antitrust
laws. Additionally, the bill would establish a three-judge panel,
called the "Electronic Payment System Judges," to make determinations
of access rates and terms for electronic payments systems. The purpose
of the panel would be to conduct proceedings to ensure that the rates
and terms established by participants in the system are calculated to
represent the rates and terms that would be negotiated in a perfectly
competitive marketplace, that is, a marketplace of willing buyers and
sellers in which neither has market power. [Footnote 20] Also, under
legislative initiatives pending in some states, merchants who are
parties to payment card agreements would be given access to information
about the issuing bank's interchange fees, including a schedule of all
interchange fees charged by the bank, as well as notice of any change
in the fees.[Footnote 21] State bills also would, among other things,
* prohibit a financial institution that issues a credit card or debit
card from charging any fee, including interchange fees, based on the
sales and use tax portion of a retail sales transaction.[Footnote 22]
* prohibit a financial institution from increasing the fee based on the
size or cost of a transaction.[Footnote 23]
* 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.[Footnote 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.[Footnote 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.[Footnote 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.[Footnote 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.
Government Entities Also Use Cards:
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. 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 Are Taking Steps to Control Costs while Realizing the
Benefits Associated with Accepting Credit and Debit Cards:
Federal entities realize benefits from accepting credit and debit
cards, including increased customer satisfaction, fewer bad checks and
cash thefts, and improved operational efficiency. 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.
Federal Entities Receive Numerous Benefits Associated with Card
Acceptance:
The ability to accept credit and debit cards provides a variety of
benefits to federal entities, including greater customer satisfaction
and improved internal operations. Officials at several federal entities
noted that card acceptance helped to ensure that the federal entities
would remain competitive with private sector organizations. Many of the
officials we spoke with told us that consumers expect to be able to use
cards to make payments, and some stated that they did not think they
could stop accepting cards. For example, Amtrak officials stated that
customers paying with cards account for about 85 percent of its sales
and that if they did not accept cards, the number of people who ride
their trains would decline significantly. Among the benefits mentioned
by federal officials with whom we spoke was that card acceptance
improves customer satisfaction with their organizations because
consumers like to use their cards for convenience, credit card reward
programs, and security reasons. Accepting cards also has enabled
entities to conduct business via the Internet, which can reduce labor
costs associated with sales and also can provide greater convenience to
customers. For example, officials from the U.S. Mint stated that about
50 percent of their sales occurred through the Mint's Web site. Some
entities also stated that the ability to accept cards has increased
their sales volume.
Federal entity officials also noted that accepting cards reduces the
amount spent on processing other forms of payment. By accepting cards,
federal entities incurred less expense in transporting cash, lower
losses from theft of cash, and had fewer bad check expenses. For
example, officials at the Department of the Interior noted that cash
transport costs can be high for some remote parks and wildlife refuges.
Several federal officials also stated that accepting cards has reduced
the costs associated with processing checks, and that funds are
deposited in accounts faster when customers use credit or debit cards
than when they use checks. Additionally, Amtrak officials told us that
accepting cards onboard trains for ticket and food and beverage sales
resulted in fewer instances of employee theft of cash.
Finally, many officials cited that card acceptance improved internal
operations at their entities. For example, officials at the Department
of the Interior stated that payments made by credit cards result in a
more streamlined bookkeeping approach because card sales involve less
paperwork (for reconciliation) than other payment forms. Defense
Commissary Agency (DeCA) officials also stated that they believed that
labor associated with reconciling sales at the end of the day declined
as a result of the reduced volume of cash. Additional operational
efficiencies mentioned by officials included a reduction in costs and
exposure to fraud and errors from misplacing or miscounting cash and
checks. Some officials stated that the efficiencies gained in their
internal operations as a result of card acceptance allowed them to
reallocate staff to different and more productive uses. For example,
officials at the Department of the Interior explained that card
acceptance at automated kiosks allowed them to reallocate some staff
that used to collect entrance fees to more productive tasks. Amtrak
officials also stated that customers' ability to purchase tickets using
cards, especially through the Amtrak Web site, has reduced their labor
costs.
Because the federal entities that utilize FMS's collection services are
not responsible for the associated card-processing costs, we could not
determine how officials at these agencies would regard card acceptance
if they had to pay these costs. However, an official at one federal
entity that accepts cards and pays the associated costs noted that it
is difficult to assess if the savings from receiving less revenue in
the form of cash or checks (and more from cards) sufficiently offsets
the entity's card-related processing costs, including the interchange
fees. He also stated that it is uncertain whether the entity receives
higher revenues from accepting cards, as some customers would likely
spend the same amount with them regardless of the type of payment used.
However, customers demand convenient payment alternatives, and for some
of their products, private sector entities provide similar services,
and thus he believed the ability to accept cards allows the entity to
stay competitive with these entities.
The federal entities we contacted were not able to provide
comprehensive data on any cost savings from accepting cards. We
identified various government, academic, and industry studies that
compared the cost of processing for different forms of payment;
however, many of these studies found that precise estimates were
difficult to calculate. Additionally, while most of the studies we
reviewed found cash to be the least expensive payment form to process,
the methodologies used in the studies were not consistent and the data
contained in many of them were outdated.[Footnote 28]
As Card Revenues Have Increased, So Have Associated Costs:
The volume of revenues accepted through credit and debit card payments
was growing for the group of federal entities we reviewed. Data on
revenues collected by FMS, which processes the card transactions for a
large number of federal executive, legislative, and judicial branch
agencies and other federal entities, show that while credit and debit
card transactions accounted for only 0.23 percent of the total federal
government revenues FMS collected in fiscal year 2007, its card
collections have grown by almost 28 percent in just 2 years--from
approximately $5.5 billion in fiscal year 2005 to almost $7.1 billion
in fiscal year 2007 (in current dollars). As shown in table 1, the
other federal entities from which we collected data also experienced an
increase in card payments over the 3-year period, with the total
reaching approximately $27 billion in credit and debit transactions for
fiscal year 2007.[Footnote 29] (App. I contains a detailed discussion
of our data sources and analysis of the data reported to us from the
federal entities.)
Table 1: Credit and Debit Card Revenues Collected and Merchant Discount
Fees Paid by Federal Entities, Fiscal Years 2005-2007:
(in current dollars):
Fiscal year: 2005;
Entity: Financial Management Service;
Credit and debit card revenues collected (dollars in billions): $5.5;
Merchant discount fees paid[A[(DOLLARS IN MILLIONS)]): $70;
Average merchant discount rate: 1.26%.
Fiscal year: 2005;
Entity: NAFIs (all);
Credit and debit card revenues collected (dollars in billions): 7.5;
Merchant discount fees paid[A](Dollars in millions): 128;
Average merchant discount rate: 1.72.
Fiscal year: 2005;
Entity: U.S. Postal Service and Amtrak;
Credit and debit card revenues collected (dollars in billions): 9.3;
Merchant discount fees paid[A](Dollars in millions): 143; Average
merchant discount rate: 1.54.
Fiscal year: 2005;
Entity: Total;
Credit and debit card revenues collected (dollars in billions): (in
current dollars)2006: 22.3;
Merchant discount fees paid[A](Dollars in millions): 341; Average
merchant discount rate: (in current dollars)2006: 1.53.
Fiscal year: 2006;
Entity: Financial Management Service;
Credit and debit card revenues collected (dollars in billions): 6.3;
Merchant discount fees paid[A](Dollars in millions): 89;
Average merchant discount rate: 1.41.
Fiscal year: 2006;
Entity: NAFIs (all);
Credit and debit card revenues collected (dollars in billions): 8.3;
Merchant discount fees paid[A](Dollars in millions): 139;
Average merchant discount rate: 1.67.
Fiscal year: 2006;
Entity: U.S. Postal Service and Amtrak;
Credit and debit card revenues collected (dollars in billions): 10.4;
Merchant discount fees paid[A](Dollars in millions): 160;
Average merchant discount rate: 1.54.
Entity: Total;
Credit and debit card revenues collected (dollars in billions): 25.0;
Merchant discount fees paid[A](Dollars in millions): 387;
Average merchant discount rate: 1.55.
Fiscal year: 2007;
Entity: Financial Management Service;
Credit and debit card revenues collected (dollars in billions): 7.1;
Merchant discount fees paid[A](Dollars in millions): 101;
Average merchant discount rate: 1.43.
Fiscal year: 2007;
Entity: NAFIs (all);
Credit and debit card revenues collected (dollars in billions): 8.5;
Merchant discount fees paid[A](Dollars in millions): 150;
Average merchant discount rate: 1.75.
Fiscal year: 2007;
Entity: U.S. Postal Service and Amtrak;
Credit and debit card revenues collected (dollars in billions): 11.5;
Merchant discount fees paid[A](Dollars in millions): 182;
Average merchant discount rate: 1.58.
Entity: (in current dollars)Entity: Total;
Credit and debit card revenues collected (dollars in billions): $27.1;
Merchant discount fees paid[A](Dollars in millions): $433;
Average merchant discount rate: 1.60%.
Source: GAO analysis of federal entity data.
Note: 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.
[A] 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.
[End of table]
As revenues from card payments have increased, so has the total amount
of merchant discount fees paid by the federal entities from which we
collected data. These federal entities reported paying a total of
almost $433 million in merchant discount fees in fiscal year 2007 (see
table 1). This figure represents an almost 12 percent increase over the
amount paid in fiscal year 2006 and an almost 27 percent increase over
the amount paid in fiscal year 2005. The average merchant discount rate
increased about 4 percent from fiscal year 2005 to fiscal year 2007.
Among the entities included in our review, Amtrak, FMS, and the Postal
Service provided data specifically showing the amount of interchange
fees associated with their Visa and MasterCard transactions (their
acquiring banks provide them with these data). These three entities
paid a total of approximately $205 million in interchange fees during
fiscal year 2007, out of a total $218 million in merchant discount fees
specifically for MasterCard and Visa transactions.[Footnote 30] These
interchange fees accounted for the majority of total merchant discount
fees these entities paid for accepting all card types. As card revenues
and merchant discount fees increased for these three entities, so did
the interchange fees they paid. Interchange fees increased by almost 36
percent, from almost $151 million in fiscal year 2005 to $205 million
in fiscal year 2007 (in fiscal year 2006, they were $179 million).
For a variety of reasons, some of the Department of Defense and
Department of Homeland Security NAFIs were not able to separate
interchange fees from the total merchant discount fees they paid. (For
example, according to an official from one entity, its contract with
its acquiring bank specified that all credit card transactions would be
charged a fixed percentage fee, regardless of the interchange fees
associated with a particular transaction; therefore, the entity did not
have specific information on interchange fees.) The data provided by
these entities showed that both card revenues and the associated
merchant discount fees increased over the 2005 to 2007 period. Revenues
from sales made on cards were about $7.5 billion in fiscal year 2005
and over $8.5 billion in fiscal year 2007, an approximately 14 percent
increase. The merchant discount fees for card payments at these
entities also increased from approximately $128 million in fiscal year
2005 to almost $150 million in fiscal year 2007, an increase of almost
17 percent.
For some payments made using cards, the government does not bear
merchant discount costs.[Footnote 31] For example, consumers can pay
their income and business taxes to the Internal Revenue Service (IRS)
using cards. To accept these payments, IRS has agreements with two
private third-party entities that process payments for individuals or
businesses that choose to use a credit or debit card to make a tax
payment. The two private entities charge a convenience fee of 2.49
percent of the total tax payment for taxpayers who use their services,
a portion of which covers the merchant discount fees paid by the third-
party entity to its acquiring bank.[Footnote 32] In fiscal year 2007,
these merchant discount fees totaled about $47.5 million for
approximately $2.4 billion in tax payments, an 85 percent increase in
tax payments made with credit and debit cards from fiscal year 2005.
In addition to the interchange and processing fees that make up the
merchant discount fee, federal entities face other costs associated
with the acceptance of credit and debit cards. For example, entities
must pay for equipment and software for card transactions, such as
point-of-sale terminals, keypads for PIN debit card transactions,
computers, modems, and printers, and pay for their installation and
maintenance. While FMS pays the merchant discount fees associated with
card transactions for entities for which it settles transactions, it
does not pay for the costs associated with equipment and software;
these costs are the responsibility of the entities. Other costs of
accepting cards include complying with industry security standards,
known as the Payment Card Industry Data Security Standard, training
employees to process and reconcile card transactions, and experiencing
losses associated with fraudulent use of cards. However, information
provided by some entities indicated that these additional costs were
not significant compared to merchant discount fees.
Federal Entities Are Making Efforts to Reduce Card Acceptance Costs:
As card acceptance has grown, federal entities have used several
methods to manage their costs and reduce the fees associated with card
transactions. One method is to ensure that their Visa and MasterCard
transactions are processed so as to qualify for the lowest applicable
interchange rate. Both Visa and MasterCard have a merchant category for
federal entities, and the interchange rates for the transactions of
merchants in these categories are lower than those for many other
merchant categories.[Footnote 33] As long as federal entities'
transactions meet all applicable processing requirements--for example,
they must be submitted for final settlement in a timely manner--the
entities are charged the interchange rate applicable to those merchant
categories. For example, as of April 2008, if transactions met all
applicable processing requirements, government entities accepting a
MasterCard consumer credit card as payment would pay an interchange fee
of 1.55 percent of the transaction amount plus $0.10, and if accepting
a Visa consumer credit card, an interchange fee of 1.43 percent of the
transaction amount plus $0.05.[Footnote 34] (In comparison, the
interchange rate applicable to a MasterCard general purpose consumer
credit card transaction at some fast food stores is 1.90 percent.) In
some cases, card transactions at federal entities can be assessed a
lower rate. For example, FMS officials told us that the DeCA's
transactions qualify to be processed using the interchange rate
applicable to the supermarket merchant category, which can range from
1.27 percent to 1.48 percent plus $0.05 for MasterCard general purpose
consumer credit card transactions, depending on the volume of card
transactions processed.
Given that the method in which the card is accepted, transaction
volume, and other factors can affect interchange rates, many federal
entities have taken steps to ensure that the acceptance and processing
procedures they follow result in the most advantageous interchange
rates applying to their transactions. For example, Amtrak officials
explained that by replacing card machines (that embossed paper
receipts) with wireless card terminals on trains, they were able to
significantly reduce the interchange rates that applied to transactions
made aboard their trains, because the electronic transaction qualified
for a lower interchange rate than the paper transactions.
Moreover, FMS officials explained that before the agency signed the
current agreement with their acquiring bank in August 2006, they
carefully reviewed the bank's interchange management capabilities and
incorporated provisions to ensure that the bank employs them. For
example, the bank is responsible for monitoring how card transactions
are being processed and the interchange rates they are being assessed.
In addition, the bank provides FMS with daily and monthly reports that
provide various levels of detail on the interchange fees paid. Both the
bank and FMS officials review these reports to identify instances in
which transactions may have been charged a higher interchange rate--
known as a downgrade--because they were not processed under the
requirements necessary to qualify for a lower rate. An FMS official
stated that FMS then works with the acquiring bank and individual
federal entity that processed the transaction to identify the reasons
and to resolve the problem in order to avoid future downgrades. For
example, an FMS official explained that in one instance a DeCA store
had a broken card terminal in a checkout aisle that prevented employees
from swiping cards. Instead, employees keyed in card information, which
resulted in a number of transactions being downgraded and assessed a
higher interchange rate. With the assistance of FMS's acquiring bank,
the problem was identified and DeCA employees were told that should the
problem reoccur, they are to use other terminals to process card
transactions, which would ensure they would not be assessed a higher
rate. An FMS official stated that under the current agreement with its
acquiring bank, very few transactions have been downgraded; however,
FMS still works to resolve these instances when they occur so that the
total cost associated with government transactions can be reduced.
Officials of two other federal government entities told us that they
similarly review data provided by their acquiring banks to identify
opportunities to reduce fees.
Another way that several federal entities have attempted to control
fees associated with card acceptance is by expanding their ability to
accept PIN debit card payments. For example, PIN debit transactions
generally are assessed lower interchange rates than "signature" debits,
and therefore some federal entities are beginning to implement the
technology necessary to accept these transactions. While federal
entities must make an investment in the equipment needed to process PIN
debit transactions (for example, PIN pads), one entity told us that the
much lower interchange 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.
Federal Entities Have Attempted to Negotiate Lower Fees:
Another way in which federal entities have acted to reduce card
acceptance costs is by negotiating with their acquiring banks for lower
merchant discount rates or with card networks for lower interchange
rates. Some of the federal entities we reviewed have realized card
acceptance savings by negotiating new acquiring bank services
contracts. These entities were able to negotiate lower rates for the
processing component of the merchant discount rate applied to their
transactions. For example, by signing a new acquiring bank agreement,
one federal entity received a substantial reduction in the processing
fee component of its merchant discount rate. Also, to obtain a more
favorable merchant discount rate for their transactions, officials from
some of the military service NAFIs have been working together to try to
negotiate a lower merchant discount rate with American Express on the
basis of the volume of transactions they provide to that company.
Officials at some of the entities with whom we spoke stated that they
did not believe they could negotiate effectively with the card
networks--MasterCard and Visa--for lower interchange rates for their
transactions. However, some federal entities stated that they have
attempted to negotiate and have had varying levels of success:
* 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.
* Officials from another federal entity told us that they have had some
success in receiving funds from one of the networks as a result of a
joint 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.
FMS Has Begun a Program to Identify Cost Savings Opportunities, but Has
Yet to Develop a Full Implementation Strategy:
In addition to looking for opportunities to reduce card acceptance
costs, FMS has initiated a program to review the overall cash
management practices of federal entities. In its role as the federal
government's central collection services provider, FMS provides federal
entities with a number of alternative revenue collection mechanisms to
meet their needs. It is also responsible for ensuring that the federal
government's collection activities are efficient and that costs are
minimized. Additionally, according to FMS, the Deficit Reduction Act of
1984 authorizes FMS to conduct periodic cash management reviews of
federal entities' financial operations.[Footnote 35] In the past, FMS
allowed federal entities for which it collected revenues to pick from
the variety of collection mechanisms that FMS offered without examining
the most cost-efficient mechanisms of collecting the revenue. However,
the Office of Management and Budget's (OMB) 2004 assessment of FMS's
collections program identified the need for FMS to develop additional
techniques to convince the federal entities to reduce paper-based
collections.
In 2007, FMS piloted a program to review the revenue collection
mechanisms used by the federal entities for which it collects revenues,
and how and from whom payments to these entities typically are made.
The reviews are designed to identify inefficiencies in current
collection mechanisms and to help FMS attain one of its strategic goals
of providing timely collection of federal government revenues, at the
lowest cost, through electronic means. According to FMS officials, the
program is not focused on card transactions, but rather on overall
payment management improvements. The reviews will allow FMS to work
with federal entities to take advantage of advances in lower-cost
technology that may have occurred since the entities began using their
existing mechanisms. Among other things, FMS is examining whether
entities are using paper collection mechanisms when they could instead
be using electronic mechanisms, or--if electronic mechanisms are
already being used--opportunities to reduce any associated fees by
substituting cheaper electronic mechanisms. For example, if an entity
accepts credit cards, FMS may also suggest cheaper collection
alternatives, such as PIN debit cards or automated clearinghouse
transactions.[Footnote 36] Once it has reviewed an entity's collections
and processes and identified improvements, FMS develops an agreement
that details the changes to be made and the timeline for implementing
them. FMS officials explained that while entities are not mandated to
implement changes in their collection mechanisms, the agreements will
provide for an "inefficiency charge" that will assess penalties to the
entity if the agreed-upon recommendations are not implemented by the
dates stipulated in the agreement. Such charges will be calculated on a
per transaction basis and require that the entity transfer funds to the
Treasury to cover the amount.
In determining which entities to review for the pilot phase, FMS
officials said that their focus for the program was first on the 24
Chief Financial Officer (CFO) agencies identified in the Chief
Financial Officers Act of 1990.[Footnote 37] FMS officials said that
they also focused on entities that showed the most potential for
savings that could be realized by revising their collection mechanisms.
Criteria used for selecting agencies to participate in the pilot
program included (1) the dollar volume of the entity's collections, (2)
the amount of revenue not collected in electronic form (that is, cash
and checks), and (3) entities with whom FMS previously experienced good
cooperation in converting paper processes to electronic mechanisms.
As of March 2008, FMS had reviewed collection cash flows at eight
federal entities and had drafted agreements to implement revised
collection procedures with each.[Footnote 38] The results confirm that
opportunities for improvement exist, although only two of the eight
agreements have been signed (the agency's goal for the program for
fiscal year 2008 is to have at least six of the eight agreements
signed). Through the eight agreements that have been developed, FMS has
identified various potential process improvements and changes that
would result in recurring cost savings. For example, FMS staff
determined that replacing the check-processing method DeCA used with a
more advanced method that converts paper checks to electronic images at
the point of sale would produce savings each time a check is presented
at a DeCA location. FMS officials told us that they previously had
developed a general estimate for cost savings that could be achieved by
converting from paper collection mechanisms to electronic collection
mechanisms before beginning the program; however, they have not
developed cost savings estimates that would be achieved by implementing
the specific actions that they have recommended at each of the entities
they have reviewed thus far. At our request, FMS officials developed an
estimate of the cost savings associated with a recommendation contained
in one of the draft agreements they have prepared. FMS estimated that
if IRS converted 67 million payments currently being received in paper
to transactions processed by an electronic system, savings of
approximately $40 million annually would result.
FMS officials stated that they have begun to prioritize the order in
which they will conduct reviews for the remainder of the federal
entities. They estimate that they will conduct reviews, and draft
agreements, with as many as 85 entities within the 24 CFO agencies. An
FMS official estimated that the average length of the reviews they plan
to complete should take approximately 6 to 9 months; however, each of
the reviews that have been conducted as part of the pilot have taken
longer. FMS officials attributed the extra length of time to conduct
reviews during the pilot phase to the fact that the program is new, and
they have spent time developing a standard review process and templates
for the agreements. Additionally, the officials explained that much of
the success and length of time a review takes is dependent on the
willingness of the entities to work with FMS and to incorporate the
recommended changes into their existing mission and goals. After
reviews of the CFO agencies are completed, FMS officials anticipate
that an additional 29 reviews will be conducted for the non-CFO
agencies for which FMS provides collection services. The FMS staff
responsible for conducting these reviews consists of five full-time
staff members that constitute a new customer relationship management
group formed in the last few years, and performing the reviews
currently consumes the majority of these staff members' time. In
addition to these five staff members, FMS has a director who oversees
the program, as well as staff in various program areas within FMS that
assist in different stages of the reviews.
Because FMS began this program as a pilot, it has not developed a full
implementation strategy that could help ensure an appropriate resource
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.
Other Countries Have Acted to Influence Interchange Rates, but Limited
Information Is Available on the Effects of These Actions on Consumers:
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.
Foreign Jurisdictions Have Taken Actions Regarding Cards:
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.[Footnote
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.[Footnote 40] In addition, the
commission recently announced that it would conduct an inquiry into
whether Visa's interchange fees similarly violate the treaty
rules.[Footnote 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.
Australia:
A 1998 amendment to Australia's Reserve Bank Act created the Payment
Systems Board within Australia's central bank, the Reserve Bank of
Australia (RBA), and tasks the board with ensuring the efficiency,
competition, and stability of that country's payment system. In 2000,
RBA published the results of a study that it conducted with the
Australian Competition and Consumer Commission, which concluded that
prices to cardholders for various forms of card payments did not
generally reflect the relative costs of those forms of payments. The
authors of the 2000 study noted that merchant discount rates for credit
card transactions averaged 1.78 percent, which included average
interchange rates of 0.95 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.[Footnote 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.[Footnote 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.
Israel:
In the late 1990s, officials at the Israel Antitrust Authority (IAA)
considered actions to address a lack of competition in their country's
credit card market. The market was dominated by two companies, each of
which issued and acquired its own major card brand. The rates of
merchant discount fees charged by these companies differed according to
merchant type, and estimates of the average merchant discount rate at
that time varied. Some estimated averages reported in 1997 and 1998
ranged from 1.9 percent to 2.46 percent. In 1998, a second company
began issuing Visa cards and acquiring Visa transactions in Israel.
According to IAA officials, the two Visa issuers executed an agreement
between them that included provisions setting the interchange rates
applicable to transactions involving their cards. IAA declared the
agreement between the companies to be a restraint of trade under
Israeli antitrust law, but granted the agreement several exemptions in
return for a gradual reduction in the interchange fees, under the
condition that Visa conduct an issuer cost study that would provide the
IAA with data to establish a suitable and acceptable interchange fee.
After these exemptions expired and the IAA found the data provided by
the Visa companies to be incomplete, the law required that banks obtain
approval of their agreement from the Israeli Antitrust Tribunal--a
court with exclusive jurisdiction over noncriminal governmental
antitrust proceedings. After years of discussions on the appropriate
costs to be covered and different methodologies for setting interchange
rates, the Israeli Antitrust Tribunal issued a decision in 2006 that
the costs that could be considered in calculating interchange rates
included those relating to:
* processing transaction authorizations,
* financing the period between when the merchant is paid and when the
issuer receives payment, and:
* payment guarantee (including both costs involving losses due to
cardholder fraud and costs related to prevention of such fraud).
At the same time that this decision was reached, the two Visa issuers,
along with Israel's single MasterCard issuer, agreed with IAA to
contract with merchants to accept both Visa and MasterCard transactions
and to gradually reduce interchange rates. Under this agreement,
interchange rates are to gradually drop from their October 2006 level
of 1.25 percent to 0.875 percent by 2012. As of January 2007,
interchange rates fell to 1.2 percent in keeping with the agreement. In
addition, in accordance with the tribunal's decision many of the
categories based on merchant type will be eliminated. However, the
transactions of government entities that accept cards in Israel will
continue to be eligible for a lower interchange rate, also in
accordance with the tribunal's decision, under the theory that
government entities do not benefit from the payment guarantee, because
they have other ways of guaranteeing payment (for example, confiscating
assets), and so the interchange fee charged on its acceptance
transactions should not include that cost. Although the Antitrust
Tribunal has 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.
Mexico:
Given responsibility for ensuring the proper functioning of payment
systems, the Banco de Mexico (the Mexican central bank) has been
encouraging the use of more efficient means of payment. In 2004, the
Banco de Mexico was granted specific authority to regulate interchange
fees in response to concerns by legislators in that country regarding
the amount that banks were charging for services as well as the lack of
sufficient information for cardholders and merchants. Shortly after the
2004 law was passed, the Association of Mexican Banks, which
establishes interchange rates in Mexico, undertook a review of
interchange rates and under the supervision of the Mexican central
bank, began to develop a method to set them. In addition, the
association and the central bank reviewed the way in which interchange
rates applied to merchants. For example, five different interchange
rates could be applied to transactions, depending on the merchant's
expected annual sales volume, with merchants with higher sales volumes
receiving lower rates. Mexican central bank officials explained to us
that they believed this led to discrimination against small merchants,
and as part of the reforms, the bank association introduced new
categories that were based on merchant type rather than size.
To address interchange rates, the bank association under the
supervision of Banco de Mexico established a method to set a
"reference" interchange rate. In contrast to the cost-based approaches
used by Australia and Israel, the bank association used a model that
balances issuing and acquiring banks' profits (net of interchange)
through the interchange fee. Prior to these developments, the
interchange rates for credit cards averaged about 2.73 percent. Since
that time rates have declined. In February 2005, the association
reduced the credit card interchange rate by an average of 43 basis
points and also eliminated the highest bracket of rates for credit
cards.[Footnote 44] Because some of the disadvantages of the previous
system persisted despite this intervention, in October 2005 the
association proposed a new mechanism for setting a reference
interchange rate, which accounts for issuer and acquirer revenues and
expected network growth in addition to issuer and acquirer costs. The
association then adjusted the 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.
Limited Information on the Effects of Interchange Rate Intervention
Suggests Some Benefit to Merchants and a Mixed Picture for Consumers:
In the three countries we examined, incomplete information is available
on the impact of actions to reduce interchange rates, but available
data indicate that merchants appear to have benefited, while the impact
on consumers has been mixed. Because the actions relating to
interchange rates in these countries generally coincided with various
other changes in credit and debit card markets, researchers' ability to
isolate and measure the specific effects of interchange rate
intervention has been limited. However, merchants in these countries
generally appear to have received benefits in the form of lower
merchant discount rates. Data on merchant discount rates for credit
cards in Australia show a significant decline in these rates since the
reforms were instituted and suggest that changes in interchange rates
have been reflected in merchant discount rates. The Australian central
bank reported that the average merchant discount rate for Bankcard,
MasterCard, and Visa had fallen by around 62 basis points to 0.79
percent between the September quarter of 2003, just prior to the
reforms, and the December quarter of 2007, which was greater than the
decline in interchange rates over that period. Merchant discount rates
for American Express and Diners Club cards, although not regulated by
the central bank, also fell by 0.29 and 0.18 percentage points,
respectively, between September 2003 and December 2007. In September
2007, the central bank estimated that, in the aggregate, merchants'
costs for card acceptance over the previous financial year were about
$920 million lower than they would have been absent the reforms.
Similar reductions also have occurred in Mexico as the credit card
merchant discount rates across all businesses declined an average of 8
percent, from 2005 through 2006. According to information provided by
IAA, average merchant discount rates have declined in Israel since
1998, especially for Visa cards; however, other factors may have
contributed to the overall decline in merchant discount rates in
Israel. For example, other regulatory actions relating to limiting
merchant discount rates also were being taken during this period. In
addition, officials from the antitrust authority expressed the belief
that the increased competition in the Visa issuing market since 1998
has contributed to the lower merchant discount rates.
Evidence relating to impacts on consumers since the interchange rate
intervention in these countries is limited. In Australia, where the
reforms have been in effect long enough to allow for some study,
cardholders have experienced a decline in the value of credit card
reward points for most cards and an increase in annual and other
consumer credit card fees. For example, RBA estimated that average
annual fee revenue from fees, such as cash advances and late payments
on bank-issued personal credit cards has doubled from around $40 per
account in 2002 to around $80 in 2006, although it did not estimate the
total amount paid by all cardholders. RBA officials attributed these
changes to their reforms of the credit card system. Although card users
may receive fewer rewards and experience higher fees when using their
cards, consumers in Australia that want to use cards to finance
purchases may benefit from the lower-interest cards that issuers began
increasingly offering after the reforms were implemented. Regulators
indicated that banks altered their business models when interchange
fees were reduced to focus more on attracting cardholders who carry a
balance. This may have been due, in part, to decreased revenue from
interchange fees. In addition, Australia's central bank has not been
able to discern whether merchants have passed along their reduction in
the costs of accepting cards--resulting from the reforms--in the prices
charged for retail goods and services. An RBA official told us,
however, that while such an effect would not likely be measurable, he
believed competition among merchants would lead merchants to pass some
portion of a reduction in their costs along to consumers. RBA's
assessment of the reforms' effects on overall welfare is positive and
it estimates that welfare gains are likely substantial.
In addition to the impact on merchants and consumers in the three
countries we examined, other developments in these countries' payment
system markets have occurred since interchange rates were lowered. For
example, in Australia, the central bank found that over the past few
years, the number and value of debit card payments grew more quickly
than those of credit card payments. The central bank stated that this
difference reflects slowing growth in the number of credit card
transactions--in part resulting from cutbacks in credit card rewards
and the introduction of surcharges--as well as increasing growth in the
number of debit card transactions due in part to new types of deposit
accounts offered by banks that make debit card transactions more
attractive. Additionally, the combined market share of MasterCard,
Visa, and Bankcard decreased, and the combined market share of American
Express and Diners Club correspondingly increased by about 1 percent to
around 16 percent of the value of credit card transactions.[Footnote
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.
Potential Effects of Taking Similar Actions on Interchange Fees in the
United States Are Uncertain:
The extent to which similar actions to lower interchange rates in the
United States might reduce costs to merchants and consumers is unclear.
While actions in the three countries examined appear to have reduced
the costs to merchants for accepting cards, less information was
available on the impact on consumers. In Australia, for example, costs
for card users appear to have increased, but having these individuals
experience higher costs could be considered more efficient and
appropriate than merchants passing their card acceptance costs along to
all consumers through higher prices for goods and services, as RBA
concluded was occurring before the reforms. However, whether consumers
choosing to make purchases with other forms of payment have experienced
any benefits was not clear.
In addition, variations in payment systems across the countries we
studied suggest that interchange levels may not be the only relevant
factor to consider when examining card costs in the United States
compared with those of other countries. For example, although average
interchange rates for credit cards in the United States are higher than
the rates that have been set in the countries we reviewed, one industry
group found in 2005 that the amount of the processing fee component
included in the total merchant discount rate applied to credit card
acceptance transactions in many other developed countries around the
world is actually greater than in the United States. Therefore,
comparing only interchange rates may not give an accurate picture of
the relative costs of card acceptance to merchants. Further, because
interchange rates are reportedly intended to balance costs across
consumers, merchants, and issuing and acquiring banks, differences in
interchange levels between the United States and other countries could
be the result of different cost structures for the banks in these
markets. For example, Israel has fewer than 10 card issuers, and
officials at the Federal Reserve Bank of Kansas City estimated in 2006
that the four largest banks in Australia issued 55 percent of cards. In
contrast, we reported in 2006 that the United States has more than
6,000 depository institutions that issue credit cards, and therefore
the costs of issuing credit cards in this country could be different
than in countries with many fewer issuing banks.[Footnote 46]
Finally, the regulatory and legal structure in the United States
differs from those of other countries. For example, unlike in Australia
and other countries we reviewed, in the United States there is no
entity specifically tasked with regulating or overseeing the
competitive aspects of the interchange fee structure or the fees'
effects on consumers. 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. In 1998, DOJ sued Visa
and MasterCard for alleged antitrust violations relating to the
networks' "exclusivity rules," which prohibited member banks from
issuing Discover or American Express cards.[Footnote 47] The court
found that the exclusivity rules were a substantial restraint on
competition in violation of the Sherman Act. Although the imposition of
interchange fees was not found to violate the law, the trial court
noted that the defendants' ability to impose and change the fees was
evidence of market power, which was an element in proving the
anticompetitive nature of the exclusivity rules.[Footnote 48] Further,
DOJ officials told us that under its authority to enforce the antitrust
laws, DOJ is again looking into issues concerning the payment systems
industry. (Also, as previously noted, interchange fees have been a
factor in lawsuits alleging violations of the federal antitrust laws by
credit card networks and related parties. In addition, private parties
are pursuing civil actions that address interchange fees under these
same laws.[Footnote 49]) FTC officials expressed to us the view that
the FTC does not have authority to regulate interchange fees. Also,
officials of the Board of Governors of the Federal Reserve noted that
the Federal Reserve does not have a specific mandate to regulate
interchange fees in the United States.[Footnote 50]
Card Usage by Federal Entities Provides Numerous Benefits, but Creates
Control Challenges:
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.[Footnote 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.
Entities' Use of Cards Has Grown Significantly and Is Expected to
Increase Further:
More than 350 federal entities participate in GSA's SmartPay program--
which provides purchase, travel, and fleet cards for these entities to
use. Federal entities pay no direct costs for the general use of
cards.[Footnote 52] According to card network officials, the banks that
issue cards to federal entities are compensated in part by the
interchange fees they receive when a government entity or employee uses
a card to make a purchase.
In fiscal year 2007, federal entities used cards to purchase more than
$27 billion of goods and services. This represents an inflation-
adjusted increase of 51 percent over fiscal year 1999 spending levels
(see fig. 2). Most of this spending occurred using purchase cards,
which account for nearly 70 percent of total federal entity card
spending, while about one-quarter of card spending was done using
travel cards and about 5 percent using fleet cards. The number of
transactions has also increased by 50 percent since 1999, from about 60
million transactions to over 90 million in 2007. However, the rate of
growth of both spending and transactions has slowed in recent years.
Figure 2: SmartPay Spending and Total Number of Transactions, Fiscal
Years 1999-2007:
This figure is a combination line graph showing SmartPay spending and
total number of transactions, fiscal years 1999-2007. The X axis
represents fiscal year. The left Y axis represents dollars in billions,
and the right Y axis represents transactions (in millions). One line
represents spending, and the other line represents transactions.
Fiscal year: "1999";
Spending: 18;
Transactions: 61.
Fiscal year: "2000";
Spending: 21;
Transactions: 65.
Fiscal year: "2001";
Spending: 23;
Transactions: 82.
Fiscal year: "2002";
Spending: 26;
Transactions: 92.
Fiscal year: "2003";
Spending: 26;
Transactions: 87.
Fiscal year: "2004";
Spending: 27;
Transactions: 88.
Fiscal year: "2005";
Spending: 26;
Transactions: 93.
Fiscal year: "2006";
Spending: 27;
Transactions: 90.
Fiscal year: "2007";
Spending: 27;
Transactions: 92.
(Numbers rounded up where applicable.)
[See PDF for image]
Source: GAO analysis of GSA data.
Note: Spending amounts adjusted for inflation to constant 2007 dollars.
[End of figure]
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.
The Director of GSA's Office of Charge Card Management also told us
that card use by federal entities is expected to continue growing as
the entities identify additional ways of using cards and implement new
payment technologies. For example, officials from the Department of
Veterans Affairs (VA) told us that they are working with the bank that
issues the department's purchase cards to find new ways to increase
card usage. They explained that in 2003 they developed a process for
making payments through the card system to non-VA medical providers for
services provided to veterans who are unable to visit a VA center for
medical care, reducing the number of checks they must issue and
increasing both the number of electronic payments made and their card
use rebates. Additionally, officials stated that VA is reviewing its
purchase records to attempt to shift more purchasing to vendors that
accept cards. Similarly, the U.S. Army has developed an automated
payment system that uses purchase cards for most of the $400 million
per year it pays schools and other institutions for soldiers' tuition
assistance. GSA officials also expect the new products and services
that will be available under the SmartPay 2 program will lead to
increases in overall card spending. Some of these products include
prepaid cards, contactless cards, and cards in foreign
currencies.[Footnote 53]
Officials Cite Various Benefits Associated with Using Cards, Including
Administrative Cost Savings and Rebates:
According to federal entity officials we spoke with, one of the primary
benefits associated with card usage is the administrative cost savings
compared with procurement methods that card usage has partially
replaced, such as purchase orders, imprest funds, and blanket purchase
agreements. For example, obtaining goods or services under a purchase
order system requires that a purchase request be filled out and
approved, then sent to a procurement office, which issues it to a
vendor. When government entities use a card, however, goods or services
can be directly purchased by cardholders, who then review their
statements at the end of the billing cycle and forward the statement to
an approving official. Officials from the Department of Agriculture
said that if cards were not used, staff would need to complete purchase
orders for each of the 1.5 million transactions per year that currently
are made using purchase cards. Officials from the Department of
Homeland Security estimated that the department would require four to
five times the current number of staff who operate its travel card
program if it paid for travel expenses without cards. In addition,
officials at the Department of Agriculture stated that new tools, such
as an automated process to reset charge card passwords, may further
reduce the costs of administering their program.
Estimates of per transaction administrative costs savings from card
usage vary, making it difficult to estimate total administrative cost
savings. GSA estimated total administrative cost savings from card use
in fiscal year 2006 to be $1.7 billion. An official from GSA told us
that this estimate was based on per transaction saving estimates by the
Purchase Card Council. In 1994, the council, an interagency group,
asked 17 civilian government organizations to perform a detailed cost-
benefit analysis comparing the use of purchase orders versus purchase
cards for transactions of $2,500 and below. The per transaction savings
estimates for the 17 organizations ranged from $1.42 to more than $142,
with an average of about $54. More recently, in a 2006 research study,
the Association of Government Accountants surveyed four civilian
agencies with an approach similar to that of the Purchase Card Council
and reported savings estimates of $60 to $166 per transaction, with a
weighted average of about $87.[Footnote 54] In comparison, a 2005
survey of almost 1,300 purchase card program administrators from
corporations, nonprofits, and government entities found, for state and
federal government entities, a $53 administrative cost savings per
transaction compared to purchase orders.[Footnote 55] Finally, a 1997
analysis by the U.S. Army Audit Agency showed that the average cost to
the U.S. Army of processing a purchase order was about $155 compared to
about $62 for a card, a savings of about $93 per transaction.[Footnote
56]
Another benefit of card use for federal entities is the receipt of
rebates from the banks that issue their cards. Rebate amounts, which,
after adjusting for inflation, have almost doubled since fiscal year
2002 to $175 million in fiscal year 2007 (see fig. 3), are based on a
number of factors, mainly the volume of net spending on cards and how
quickly balances on the cards are paid. GSA establishes a minimum
rebate rate that federal entities should receive, but entities can
choose to negotiate with their issuing banks for additional amounts.
Between 1998 and 2007, the minimum rate was 6 basis points of the net
volume of spending on the cards, while under the SmartPay 2 program,
the minimum rebate rate will increase to 8 basis points.[Footnote 57] A
GSA official stated that typically in federal entities' negotiations
with issuing banks, the rebate rate is increased as an incentive for an
entity to choose a particular bank to issue its cards. According to the
GSA official, however, some entities negotiate for specialized services
rather than increased rebate amounts, and GSA encourages agencies to
examine their programs holistically when negotiating terms.
Figure 3: Total Rebates Received from SmartPay Card Use, Fiscal Years
2002-2007:
This figure is a vertical bar graph showing total rebates received from
SmartPay card use, fiscal years 2002-2007. The X axis represents the
fiscal year, and the Y axis represents dollars in millions.
Fiscal year: 2002;
Dollars in millions: 89.
Fiscal year: 2003;
Dollars in millions: 128.
Fiscal year: 2004;
Dollars in millions: 144.
Fiscal year: 2005;
Dollars in millions: 172.
Fiscal year: 2006;
Dollars in millions: 169.
Fiscal year: 2007;
Dollars in millions: 175.
[See PDF for image]
Source: GAO analysis of GSA data.
Note: Rebate amounts adjusted for inflation to 2007 constant dollars.
[End of figure]
Federal entities differ in how they use their rebates. Two of the
federal entities we spoke with return the rebates directly to the
location that originated the relevant transaction, one adds the rebates
into general 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.[Footnote 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.
While Minimizing Card Abuse Poses Control Challenges, Banks Provide
Tools to Help Entities Address Them:
Officials at the federal entities with whom we met cited only a few
drawbacks associated with the use of cards, though officials from some
entities mentioned the risk of fraud and misuse. However, these
officials told us that the risk of these occurrences is less than or
equal to that under previously used procurement systems. Although the
instances of fraud and misuse on cards may be infrequent, we and
several inspectors general have reported internal control weaknesses in
charge card programs at federal entities and instances of fraud and
abuse. For example, in 2001 and 2002 we issued reports on control
weaknesses in purchase card programs at the Air Force, Army, and Navy.
The reports contained over 100 recommendations targeted at improving
the design and implementation of controls over card use and
establishing guidelines for disciplining those who misuse their
government purchase cards.[Footnote 59] In 2003, we reported that the
military services had begun or implemented nearly all of those
recommendations, some of which were included in legislative
requirements for the Department of Defense.[Footnote 60] In addition,
earlier this year we reported on breakdowns in internal controls in
various federal entity purchase card programs, which in some instances
resulted in fraudulent, improper, and abusive use of purchase
cards.[Footnote 61]
For the most part, fraud and misuse can be limited through strong
internal controls in card programs of federal entities. GSA and OMB
have issued guidance on internal controls intended to reduce the risk
of misuse of cards. For example, GSA develops guidance through training
courses for federal entities and publishes guidelines for oversight and
information on detecting misuse and fraud. Additionally, OMB has issued
several memorandums related to oversight of card programs. For example,
a 2002 OMB memorandum provided that each federal entity review the
adequacy of its internal controls for purchase and travel card
expenditures, and required entities to submit action plans detailing
any risks associated with these programs and identifying the internal
controls that will be used to manage these risks. In 2005, OMB also
issued an appendix to its 1995 circular on management accountability
and control, which consolidated and updated governmentwide card program
requirements and included minimum requirements and best practices on
several aspects of card programs. Some of the best practices to limit
fraud and misuse identified in these guidance documents included
implementing appropriate training for cardholders, approving officials,
and other staff; deactivating cards that 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.
Conclusions:
Federal entities' acceptance of credit and debit cards provides a
number of benefits, including client and customer convenience, but also
entails costs. In collecting over $27 billion in revenue via cards in
2007, the transactions of federal entities included within the scope of
this report resulted in more than $430 million in merchant discount
fees, including at least $205 million in interchange fees (paid by
entities that provided us with data specifically on interchange fees).
Federal entities have undertaken a number of worthwhile actions to
ensure that card acceptance costs are minimized. Further, FMS's program
to comprehensively examine the revenue sources and collection
mechanisms used by the many entities for which it performs collections
shows great promise for achieving savings and identifying improvements
for revenue collection, whether through cards or other mechanisms.
Since its initiation on a pilot basis in 2007, this program has already
identified potential cost savings or efficiency improvements at the
eight entities FMS has examined to date. Because such savings would be
recurring--in that they are applicable to future transactions--this
program appears to be a valuable effort for FMS to complete in a timely
manner. Ensuring that FMS's program implementation strategy has
additional elements, such as a timeline for completing the reviews,
cost savings estimates, and an assessment of the adequacy of the
resources committed will increase the likelihood of FMS achieving its
goals as expeditiously as possible. Establishing a timeline for
completion would allow FMS management to determine whether the program
is being implemented expeditiously, including taking action if interim
milestones are not being met. Generating cost savings estimates would
appear to provide FMS with an additional tool for prompting entities to
implement the improvements that are identified. Further, establishing a
timeline for monitoring progress and estimating the cost savings to be
realized could also allow FMS to better assess whether the level of
resources committed to the program is appropriate. Perhaps most
important, developing a full implementation strategy would allow FMS to
identify potential cost savings for its collection activities--and
federal entities to begin realizing them--more quickly, resulting in
larger overall financial benefits to the government.
Other countries have examined the significance of interchange fees as
part of credit and debit card payments, and several have taken or are
considering actions to improve efficiencies and reduce costs involving
their card payment systems. In one of the three countries we examined
that has acted to limit interchange fees, available evidence suggests
that the costs for merchants from accepting cards has declined but the
direct costs for consumers using cards may have increased. However, a
number of factors may be influencing costs, and additional data and
study would be needed to more definitively assess the effects of these
actions. Further adding to the difficulty of estimating the potential
effects of such actions in the United States, are differences in the
structure and regulation of the U.S. card payment market from those of
the other countries we examined.
Federal entities have realized benefits from using cards to make
purchases of needed goods and services, including supplies, travel
expenses, and vehicle operating costs, and have taken actions to
address the challenge of ensuring that cards are used only for intended
purposes. In addition to increased efficiency in administrative
processes and cost savings, in fiscal year 2007 card use also produced
about $175 million in additional operating funds through the rebates
provided by the banks that issue government cards. Agencies have
acknowledged the continuing need to ensure adequate monitoring and to
have controls in place to minimize fraudulent and abusive use of their
cards. The ability to analyze data on card activities--a capability
that the issuing banks are providing to agencies--appears to be a
valuable tool, in that it helps federal entities manage their card
activities and potentially reduces costs for the government.
Recommendation for Executive Action:
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.
Agency Comments and Our Evaluation:
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 e-commerce 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
[hyperlink, http://www.gao.gov].
Please contact me at (202) 512-8678 or hillmanr@gao.gov if you or your
staff have any questions about this report. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. Key contributors to this report are
listed in appendix III.
Sincerely yours,
Signed by:
Richard J. Hillman:
Managing Director, Financial Markets and Community Investment:
List of Requesters:
The Honorable Arlen Specter:
Ranking Member:
Committee on the Judiciary:
United States Senate:
The Honorable Herb Kohl:
Chairman:
Subcommittee on Antitrust, Competition Policy and Consumer Rights:
Committee on the Judiciary:
United States Senate:
The Honorable Thomas R. Carper:
Chairman:
Subcommittee on Economic Policy:
Committee on Banking, Housing, and Urban Affairs:
United States Senate:
The Honorable Tom Davis:
Ranking Member:
Committee on Oversight and Government Reform:
House of Representatives:
The Honorable Darrell Issa:
Ranking Member:
Subcommittee on Domestic Policy:
Committee on Oversight and Government Reform:
House of Representatives:
The Honorable John E. Sununu:
United States Senate:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
Our objectives were to examine (1) the benefits and costs, including
interchange fees, associated with federal entities' acceptance of cards
as payment for the sale of goods, services, and revenue collection; (2)
actions taken in countries that have regulated or otherwise limited
interchange fees and their impact; and (3) the impact on federal
entities of using cards to make purchases.
To determine the benefits received by federal entities from the
acceptance of credit and debit cards, we conducted semistructured
interviews with five judgmentally selected federal entities that
participate in Financial Management Service's (FMS) Credit and Debit
Card Acquiring Service, which is a governmentwide service that allows
federal entities to accept payment by Visa, MasterCard, American
Express, and Discover cards, as well as some types of debit cards. FMS
provides this service to any executive, judicial, and legislative
branch agency; government corporation; commission; board; or other
federal entity that determines that the acceptance of cards is needed
for revenue collection. Three of the five entities we contacted were
among those that conducted the highest volume of card transactions, and
two entities were among those that conducted the lowest volume of card
transactions.[Footnote 62] We also reviewed and summarized studies and
reports on the costs associated with processing different forms of
payment to identify how these costs compared with the costs associated
with card acceptance.
To estimate the costs associated with federal entities' acceptance of
cards as payment, we collected data from as broad a range of entities
associated with the federal government as possible. To determine the
federal entities from which to collect data, we met with FMS who
provided us with data on all federal entities that participate in its
Credit and Debit Card Acquiring Service. FMS provided us data on
revenues collected through card transactions and the merchant discount,
interchange, and processing fees it paid for these entities' acceptance
of cards for fiscal years 2005 through 2007. Additionally, FMS
officials provided us with a list of Department of Defense and
Department of Homeland Security nonappropriated fund instrumentalities
that have independent authority to collect revenue and thus handle
their own card collections. We reviewed data for these entities as
well. These entities included:
* Air Force Services Agency,
* U.S. Army and MWR Command,
* Army and Air Force Exchange Service,
* Marine Corps Community Services,
* Navy Exchange Service Command,
* Navy Morale, Welfare and Recreation,
* Coast Guard Exchange System, and:
* Coast Guard Morale, Well-being, and Recreation.
The U.S. Postal Service, Amtrak, and Smithsonian Institution operate
their own card collection programs as well and do not utilize FMS's
services, thus we collected data directly from those entities for
fiscal years 2005 through 2007. Smithsonian Institution and the Coast
Guard Morale, Well-being, and Recreation were unable to provide us data
on their card collection programs for this period of time because they
do not maintain centralized program data on card revenues and fees.
Instead, their card operations are decentralized among the various
locations in which they operate. We also collected data from two
private entities that accept tax payments made by credit and debit
cards on behalf of the Internal Revenue Service (IRS). These two
entities--Official Payments Corporation and LINK2GOV--provide this
service at no cost to IRS and instead charge taxpayers who choose to
use their services a convenience fee for doing so. While we report the
card acceptance fees associated with federal tax payments for these two
entities, we do not include them in the total amount of card acceptance
fees paid by federal entities. We did not attempt to determine
additional federal entities beyond those listed here that may operate
their own card collection programs and therefore pay fees related to
card acceptance.
From each of the entities that we collected data, we requested three
pieces of information for fiscal years 2005 through 2007:
* total amount of revenue collected in credit and debit cards,
* total amount of interchange fees assessed on card transactions, and:
* 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.[Footnote 63] 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.
To examine actions taken in countries that have limited interchange
fees, we reviewed available literature, contacted our counterparts
(other audit institutions) in several countries, and interviewed
Federal Reserve and industry officials to identify various countries
where regulators or others had taken such actions. We judgmentally
selected countries for further examination from among those identified
based on three criteria: (1) actions had been taken that required
actually determining interchange rates, (2) information available on
the methods they used to determine the rates had been made available
(3) efforts had been under way for sufficient time to allow for study.
To allow for illustration of diverse approaches to limiting interchange
fees, we sought to include countries that had taken different types of
actions. In addition, in order to study the impacts of these actions,
we sought to include countries where the effects of the intervention
had been the subject of empirical study. On the basis of these
criteria, we selected three countries--Australia, Israel, and Mexico--
for more detailed study. We conducted further literature reviews on
these countries and conducted interviews with officials involved in the
efforts to limit rates in each of these countries to learn about the
measures taken, other measures that were considered, and any empirical
data on the effects of the interchange limitation. Additionally, we met
with officials from the Board of Governors of the Federal Reserve
System, Department of Justice, and the Federal Trade Commission to
learn how the regulatory and legal structure in the United States
addresses interchange fees.
To determine the impact on federal entities of using cards to make
purchases, we obtained and analyzed fiscal years 1999 through 2007
General Services Administration (GSA) SmartPay program data on
spending, transactions, and rebates received. On the basis of our
review and testing of GSA's data for a separate engagement, we
determined that these data were sufficiently reliable for the purposes
of this engagement. Dollar values have been adjusted for this objective
to fiscal year 2007 constant dollars using the gross domestic product
(GDP) price index.[Footnote 64] Additionally, we reviewed policies and
procedures related to card usage from GSA and other government
entities, as well as our prior reports, and academic and government
reports. To obtain their views on the benefits and drawbacks of card
usage, we interviewed officials from GSA, 5 federal entities that were
among the 10 entities with the highest spending and most transactions
on cards in fiscal year 2006, the bank that issued cards 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.
[End of section]
Appendix II: Summary of Major Federal Antitrust Actions Surrounding
Interchange Rates:
The following identifies key cases concerning interchange fees.
NaBanco:
In this 1980s case, NaBanco claimed that the setting of credit card
interchange fees by Visa member banks constituted unlawful price
fixing.[Footnote 65] NaBanco was a third-party enterprise that
processed credit card transactions for its client acquiring banks, who
were members of the Visa network. NaBanco alleged that the imposition
of an interchange fee affected the amount it could collect for its
service, and that under Visa's rules the fee had an anticompetitive
effect. The court ruled that NaBanco did not satisfy its burden of
proof under a "rule of reason" analysis to show that interchange fees
were a restraint of trade.
Department of Justice proceeding:
In 1998, Department of Justice (DOJ) sued Visa and MasterCard for
alleged antitrust violations.[Footnote 66] In that proceeding, the
government focused on two points. First, the department claimed that
because the boards of Visa and MasterCard were dominated by many of the
same banks, intersystem competition was reduced. Second, DOJ challenged
the networks' "exclusivity rules," which prohibited member banks from
issuing Discover or American Express cards. The court ruled against the
government on the first claim (DOJ did not appeal) but found that the
exclusivity rules were a substantial restraint on competition in
violation of the Sherman Act. The district court invalidated the
exclusivity rules, enjoined the defendants from restricting banks from
issuing other cards, and permitted Visa and MasterCard issuers to
terminate any contractual obligations to abide by the exclusivity
rules. Although the imposition of interchange fees was not found to
violate the law, the court noted that the defendants' ability to impose
and change the fees was evidence of market power, which was an element
in proving the anticompetitive nature of the exclusivity
rules.[Footnote 67]
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.[Footnote 68] 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."[Footnote 69]
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.[Footnote 70] 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.
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
Richard J. Hillman, (202) 512-8678 or hillmanr@gao.gov:
Staff Acknowledgments:
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.
[End of section]
Footnotes:
[1] Federal Reserve System, The 2007 Federal Reserve Payments Study:
Noncash Payment Trends in the United States: 2003-2006 (Dec. 10, 2007).
[2] In most cases the acquiring bank and the issuing bank for Visa and
MasterCard transactions are different institutions. In contrast,
American Express and Discover are "proprietary" networks that act as
both the issuing and acquiring entities. As a result, they retain the
entire amount of the merchant discount fee they receive from merchants'
sales to American Express and Discover card users. Accordingly,
American Express and Discover transaction fees are included in the
total merchant discount fee amounts presented in this report, but not
in the interchange fee amounts.
[3] 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.
[6] 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.
[7] We use the term "federal entity" throughout this report broadly to
refer to departments, agencies, bureaus, government corporations, and
any instrumentality or organization that, regardless of whether it
receives federally appropriated funds, performs a function sanctioned
by the federal government to achieve a federal objective or serve a
federal interest. The latter groups of entities include, for example,
Amtrak, the U.S. Postal Service, and commercial facilities operated at
military bases. Therefore, our estimates of the costs associated with
card acceptance by federal entities include some costs that are not
directly borne by the government.
[8] 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.
[9] 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.
[10] We also attempted to collect card acceptance costs from the
Smithsonian Institution and from some Coast Guard NAFIs, but the
decentralized way in which they maintained their data prevented their
providing us with the information.
[11] 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.
[12] 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.
[14] 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).
[15] 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.
[17] 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.
[18] 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.
[19] Pub. L. No. 90-321, Title I, 82 Stat. 146 (1968) (codified as
amended at 15 U.S.C. §§ 1601-1666). 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).
[20] H.R. 5546, 110th Cong. (2008).
[21] See, e.g., H.B. 2857, 82nd Leg., (KS 2008); L.B 174, 100th Leg.,
(NE 2007); A.B. 7775, NY 2007-2008 Regular Sess. (2007).
[22] S.B. 1138, 213th Leg. (NJ 2008); H.B. 3321 51st Leg., 2d Sess. (OK
2008).
[23] See, e.g., H.B. 2856, 82nd Leg. (KS 2008).
[24] Sen. J. Mem. Res. 8020, 60th First Reg. Sess. (WA 2007); H.J.R. 53
(VT. 2008).
[25] These include cases involving allegations that interchange fees
are evidence of the use of market power to commit unlawful price fixing
and tying. See, e.g., In re Visa Check/Mastermoney Antitrust Litig.,
297 F. Supp. 2d 503 (E.D.N.Y. 2003) (Wal-Mart I), aff'd sub nom., Wal-
Mart Stores, Inc. v. Visa USA, Inc., 396 F.3d 96 (2d Cir. 2005) (Wal-
Mart II); see also United States v. Visa U.S.A., Inc., 163 F . Supp. 2d
. 322 (S.D.N.Y. 2001), aff'd, 344 F.3d 229 (2d Cir 2003), dert. Denied,
543 U.S. 811 (2004).
[26] 15 U.S.C. §§ 1 - 7.
[27] 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.
[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).
[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.
[30] 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.
[33] This category is referred to as Public Sector for MasterCard and
Customer Payment Service Retail 2 (Emerging Markets) for Visa.
[34] Different interchange rates may apply when a commercial card is
presented for payment at a federal entity.
[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.
[37] See 31 U.S.C. § 901(b). The agencies listed in this provision are
the Departments of Agriculture, Commerce, Defense, Education, Energy,
Health and Human Services, Homeland Security, Housing and Urban
Development, the Interior, Justice, Labor, State, Transportation, the
Treasury, Veterans Affairs, and the Environmental Protection Agency,
the National Aeronautics and Space Administration, the Agency for
International Development, the General Services Administration, the
National Science Foundation, the Nuclear Regulatory Commission, the
Office of Personnel Management, the Small Business Administration, and
the Social Security Administration.
[38] 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.
[39] Included in the countries identified by the sources are Argentina,
Australia, Austria, Brazil, Canada, Chile, Colombia, Denmark, France,
Hungary, Israel, Mexico, New Zealand, Norway, Panama, Poland, Portugal,
Romania, Singapore, South Africa, South Korea, Spain, Sweden,
Switzerland, Turkey, and the United Kingdom. GAO did not conduct an
independent survey or in-depth legal analysis of actions taken by
foreign countries.
[40] IP/07/1959, Brussels, 19 December 2007.
[41] MEMO/08/170, Brussels, 26 March 2008.
[42] In Australia, the credit card market is structured differently
from the debit card market, and the regulation of debit interchange
fees has proceeded in a different manner. We focus our discussion on
developments affecting credit card interchange fees.
[43] Bankcard was a domestic credit card that closed in the first half
of 2007.
[44] A basis point is equal to .01 percent or 1/100th of a percent.
[45] In Australia, until recently American Express cards were issued
exclusively by American Express in a proprietary model similar to that
in the United States.
[46] GAO-06-929, p.10.
[47] United States v. Visa U.S.A., Inc., 163 F. Supp. 2d 322 (S.D.N.Y.
2001), aff'd, 344 F.3d 229 (2d Cir 2003), Cert. Denied, 543 U.S. 811
(2004).
[48] 163 F. Supp. 2d at 340; see 244 F. 3d at 239-40.
[49] In re Payment Card Interchange Fee and Merchant Discount Antitrust
Litigation, 398 F. Supp.2d 1356 (E.D. NY Oct. 19, 2005).
[50] The Board of Governors of the Federal Reserve has regulatory
authority over the processing of payments but does not regulate the
fees that banks pay for participating in private credit card payments
systems.
[51] Fleet cards are used for fuel and supplies for government
vehicles.
[52] 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.
[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.
[54] AGA Corporate Partner Advisory Group Research, "The Federal
Purchase Card: Use, Policy, and Best Practice," AGA CPAG Research
Series, Report No. 4 (April 2006).
[55] Richard J. Palmer and Mahendra Gupta, "The 2005 Purchasing Card
Benchmark Survey Report" (2006).
[56] U.S. Army Audit Agency, "Savings from Acquisition Reform" Audit
Report: AA 97-58 (Alexandria, Virginia: Jan. 7, 1997).
[57] 57GSA 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.
[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).
[59] GAO, Purchase Cards: Control Weaknesses Leave Two Navy Units
Vulnerable to Fraud and Abuse, GAO-02-32 (Washington D.C.: Nov. 30,
2001); Purchase Cards: Control Weaknesses Leave Army Vulnerable to
Fraud, Waste, and Abuse, GAO-02-732 (Washington, D.C.: June 27, 2002);
Purchase Cards: Navy Is Vulnerable to Fraud and Abuse but Is Taking
Action to Resolve Control Weaknesses, GAO-02-1041 (Washington D.C.:
Sept. 27, 2002); Purchase Cards: Control Weaknesses Leave the Air Force
Vulnerable to Fraud, Waste, and Abuse, GAO-03-292 (Washington, D.C.:
Dec. 20, 2002).
[60] GAO, Purchase Cards: Steps Taken to Improve DOD Program Management
but Actions Needed to Address Misuse, GAO-04-156 (Washington, D.C.:
Dec. 2, 2003).
[61] 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).
[61] 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.
[62] 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.
[63] 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.
[64] 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).
[65] United States v. Visa U.S.A., Inc., 163 F . Supp. 2d . 322
(S.D.N.Y. 2001), aff'd, 344 F.3d 229 (2d Cir 2003), Cert. Denied, 543
U.S. 811 (2004).
[66] 163 F. Supp. 2d at 340; see 244 F. 3d at 239-40.
[67] In re Payment Card Interchange Fee and Merchant Discount Antitrust
Litigation, 398 F. Supp.2d 1356 (E.D. NY Oct. 19, 2005).
[68] 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.)
[69] Kendall v. Visa U.S.A., Inc., 518 F.3d 1042 (9th Cir. 2008).
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