Credit and Debit Cards
Federal Agencies Benefit from Card Acceptance, but Have Limited Ability to Control Interchange Fee Costs Gao ID: GAO-10-821T June 16, 2010Federal entities--agencies, corporations, and others--are growing users of credit and debit cards, as both "merchants" (receiving payments) and purchasers. Federal entities, like other merchants that accept cards, incur fees--called merchant discount fees--to process card transactions. For Visa and MasterCard transactions, a large portion of these fees-- referred to as interchange fees--goes to the card-issuing banks. This statement addresses (1) the amounts of revenue that federal entities have collected using credit and debit cards and the costs of such acceptance, (2) these entities' efforts to reduce their interchange fee costs, including negotiations, and (3) the extent to which card network rules affect these entities and other card accepters' ability to reduce interchange fee costs. The information for this statement was drawn from Credit and Debit Cards: Federal Entities Are Taking Actions to Limit Their Interchange Fees, but Additional Revenue Collection Cost Savings May Exist (GAO-08-558) and Credit Cards: Rising Interchange Fees Have Increased Costs for Merchants, but Options for Reducing Fees Pose Challenges (GAO-10-45). GAO analyzed data on accepting and using cards from the Department of the Treasury (Treasury), Amtrak, the Postal Service, and General Services Administration (GSA); and interviewed non-federal merchants, card networks, banks, academics, and others. GAO also obtained updated 2009 revenues and costs from Treasury, Amtrak, and the Postal Service, and purchases from GSA.
As federal entities' card revenues have increased, so have their associated costs. In fiscal year 2007, federal entities collected more than $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. Since GAO originally reported in 2008, total card acceptance costs for the U.S. Postal Service and Amtrak grew from $182 million in 2007 to $204 million in fiscal year 2009. Card costs for Treasury's Financial Management Service (FMS) grew from $101 million to $116 million during this same period. 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 addition to accepting cards, federal entities also use cards to make purchases for supplies or employee travel expenses, and these purchases totaled about $30 billion in fiscal year 2009. Federal entity officials noted that using cards provides a variety of benefits, including lower administrative costs and rebates of a small percentage of the card purchases that they make, which totaled about $255 million in 2009. Federal entities have worked to control the costs associated with card acceptance fees. Card networks already offer interchange rates for government transactions that are lower than those for many other merchants' transactions, but Treasury also requires the banks that process federal entities' card transactions to ensure that these receive the lowest interchange rates for which they are eligible. Some federal entities have attempted to negotiate with the card networks to lower interchange rates applicable to their transactions, but with limited success. Similarly, GAO's more recent work indicated that non-federal merchants have also experienced little success in negotiating with card networks to lower these fees. Various card network rules have been a major factor limiting federal entities' and merchants' ability to negotiate lower interchange fees. Each of the major card networks--Visa, MasterCard, American Express, and Discover--have various card acceptance rules that prohibit card accepters from imposing surcharges on cards, refusing to accept certain cards--such as rewards cards with higher associated interchange fees, or establishing minimum or maximum charges. Although various options have been debated for lowering interchange fees, merchants and others GAO interviewed most supported removing certain card network rules. If interchange fees were lowered, card users might benefit from lower prices for goods and services, but lower interchange revenues for card issuers could prompt them to increase cardholder costs, offer less generous rewards, or curtail cardholder credit availability--although consumers and federal entities could still enjoy various other benefits of using cards, such as convenience and efficiency.
GAO-10-821T, Credit and Debit Cards: Federal Agencies Benefit from Card Acceptance, but Have Limited Ability to Control Interchange Fee Costs
This is the accessible text file for GAO report number GAO-10-821T
entitled 'Credit And Debit Cards: Federal Agencies Benefit from Card
Acceptance, but Have Limited Ability to Control Interchange Fee Costs'
which was released on June 16, 2010.
This text file was formatted by the U.S. Government Accountability
Office (GAO) to be accessible to users with visual impairments, as
part of a longer term project to improve GAO products' accessibility.
Every attempt has been made to maintain the structural and data
integrity of the original printed product. Accessibility features,
such as text descriptions of tables, consecutively numbered footnotes
placed at the end of the file, and the text of agency comment letters,
are provided but may not exactly duplicate the presentation or format
of the printed version. The portable document format (PDF) file is an
exact electronic replica of the printed version. We welcome your
feedback. Please E-mail your comments regarding the contents or
accessibility features of this document to Webmaster@gao.gov.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
Testimony:
Before the Financial Services & General Government Subcommittee,
Committee on Appropriations, U.S. Senate:
United States Government Accountability Office:
GAO:
For Release on Delivery:
Expected at 2:30 p.m. EDT:
Wednesday, June 16, 2010:
Credit And Debit Cards:
Federal Agencies Benefit from Card Acceptance, but Have Limited
Ability to Control Interchange Fee Costs:
Statement of Alicia Puente Cackley, Director:
Financial Markets and Community Investment:
GAO-10-821T:
GAO Highlights:
Highlights of GAO-10-821T, a report to Financial Services & General
Government Subcommittee, Committee on Appropriations, U.S. Senate.
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. Federal entities, like other merchants that accept
cards, incur fees”called merchant discount fees”to process card
transactions. For Visa and MasterCard transactions, a large portion of
these fees”-referred to as interchange fees”-goes to the card-issuing
banks. This statement addresses (1) the amounts of revenue that
federal entities have collected using credit and debit cards and the
costs of such acceptance, (2) these entities‘ efforts to reduce their
interchange fee costs, including negotiations, and (3) the extent to
which card network rules affect these entities and other card accepters‘
ability to reduce interchange fee costs. The information for this
statement was drawn from Credit and Debit Cards: Federal Entities Are
Taking Actions to Limit Their Interchange Fees, but Additional Revenue
Collection Cost Savings May Exist (GAO-08-558) and Credit Cards:
Rising Interchange Fees Have Increased Costs for Merchants, but
Options for Reducing Fees Pose Challenges (GAO-10-45). GAO analyzed
data on accepting and using cards from the Department of the Treasury
(Treasury), Amtrak, the Postal Service, and General Services
Administration (GSA); and interviewed non-federal merchants, card
networks, banks, academics, and others. GAO also obtained updated 2009
revenues and costs from Treasury, Amtrak, and the Postal Service, and
purchases from GSA.
What GAO Found:
As federal entities‘ card revenues have increased, so have their
associated costs. In fiscal year 2007, federal entities collected more
than $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. Since GAO originally reported in 2008,
total card acceptance costs for the U.S. Postal Service and Amtrak
grew from $182 million in 2007 to $204 million in fiscal year 2009.
Card costs for Treasury‘s Financial Management Service (FMS) grew from
$101 million to $116 million during this same period. 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 addition to accepting cards, federal
entities also use cards to make purchases for supplies or employee
travel expenses, and these purchases totaled about $30 billion in
fiscal year 2009. Federal entity officials noted that using cards
provides a variety of benefits, including lower administrative costs
and rebates of a small percentage of the card purchases that they
make, which totaled about $255 million in 2009.
Federal entities have worked to control the costs associated with card
acceptance fees. Card networks already offer interchange rates for
government transactions that are lower than those for many other
merchants‘ transactions, but Treasury also requires the banks that
process federal entities‘ card transactions to ensure that these
receive the lowest interchange rates for which they are eligible. Some
federal entities have attempted to negotiate with the card networks to
lower interchange rates applicable to their transactions, but with
limited success. Similarly, GAO‘s more recent work indicated that non-
federal merchants have also experienced little success in negotiating
with card networks to lower these fees.
Various card network rules have been a major factor limiting federal
entities‘ and merchants‘ ability to negotiate lower interchange fees.
Each of the major card networks-”Visa, MasterCard, American Express,
and Discover-”have various card acceptance rules that prohibit card
accepters from imposing surcharges on cards, refusing to accept
certain cards”such as rewards cards with higher associated interchange
fees, or establishing minimum or maximum charges. Although various
options have been debated for lowering interchange fees, merchants and
others GAO interviewed most supported removing certain card network
rules. If interchange fees were lowered, card users might benefit from
lower prices for goods and services, but lower interchange revenues
for card issuers could prompt them to increase cardholder costs, offer
less generous rewards, or curtail cardholder credit availability”-
although consumers and federal entities could still enjoy various
other benefits of using cards, such as convenience and efficiency.
View [hyperlink, http://www.gao.gov/products/GAO-10-821T] or key
components. For more information, contact Alicia Puente Cackley at
(202) 512-7022 or cackleya@gao.gov.
[End of section]
Mr. Chairman and Members of the Committee:
I am pleased to be here today to discuss issues relating to the extent
to which federal entities accept payments from credit and debit cards
and the associated costs, including interchange fees. Each time a
consumer uses a credit card to make a purchase, a portion of the sale--
known as the merchant discount fee--is deducted and distributed among
the merchant or federal entity's financial institution, the financial
institution that issued the card, and the card network that processed
the transaction. The majority of this amount generally is called the
interchange fee and goes to the financial institution that issued the
card, which reported using the revenues from these fees to cover their
costs of maintaining card programs. More specifically, I will discuss
recent work we have conducted related to these fees, including (1) the
amounts of revenue that federal entities have collected using credit
and debit cards and the costs of such acceptance, (2) efforts such
entities have made to reduce their interchange fee costs, including
negotiations, and (3) the extent to which card network rules affect
card accepters' ability to reduce interchange fee costs.[Footnote 1]
In summary, we reported in 2008 that as the volume of federal
entities' card payment revenues have increased, so have their
associated costs. In fiscal year 2007, federal entities collected a
total of more than $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 2] 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 addition to accepting cards, federal
entities use cards to purchase supplies and pay for employee travel
and transportation expenses. Card purchases by federal entities
totaled more than $27 billion in fiscal year 2007. Since we originally
reported, total card acceptance costs for the U.S. Postal Service and
Amtrak grew from $182 million in 2007 to $204 million in fiscal year
2009. Card costs for the Department of the Treasury's Financial
Management Service (FMS) grew from $101 million to $116 million during
this same period. Federal entity officials told us that benefits of
card use include lower administrative costs when compared with the
slower, more labor-intensive purchasing methods previously used.
Furthermore, federal entities obtain rebates of a small percentage of
the card purchases that they make, which totaled approximately $175
million in fiscal year 2007, and grew to $255 million in fiscal year
2009. Although receiving various benefits, federal entities using
cards to make purchases have had to implement controls and procedures
to prevent misuse.
As card acceptance has become more common, federal entities worked to
control the associated fees. The card networks already offer
interchange rates for government transactions that are lower than
those for many other merchants' transactions. Additionally, FMS, which
processes the card transactions for numerous federal executive,
legislative, and judicial branch agencies and other federal entities,
requires the banks that process its card transactions--known as
acquiring banks--to monitor how transactions are processed to ensure
that these transactions receive the lowest interchange rates for which
they are eligible. Some federal entities have attempted to negotiate
with the card networks to lower interchange rates for their
transactions, with varying success. Similarly, our more recent work
indicated that non-federal merchants also have experienced little
success in negotiating lower fees with card networks.
Card network rules restrict their abilities to differentiate among the
cards they accept or take other actions and are a major factor
limiting the leverage that federal entities and merchants have to
negotiate lower interchange fees. Each of the major card networks--
Visa, MasterCard, American Express, and Discover--have card acceptance
rules--generally known as anti-steering rules--that limit the options
that federal entities and merchants have for accepting or denying
cards, including prohibiting them from:
* imposing surcharges on cards,
* refusing to accept certain cards--such as rewards cards with higher
associated interchange fees, or:
* establishing minimum or maximum charges.
According to merchants and some academic researchers, these rules
constrain the ability of federal entities and merchants to limit the
costs of credit card acceptance. For example, by not being able to
charge more for credit cards generally, for a particular network's
cards, or for higher interchange fee cards, these entities are unable
to steer customers towards lower-cost forms of payment or recoup some
of their costs for higher-cost cards. In addition, without the ability
to influence customers' payment choices, these entities are unable to
use their influence with the networks to encourage them to lower
interchange and other fees in general, or offer more lower-fee cards.
In contrast, representatives of issuers and card networks told us that
the network rules are designed to promote the wide acceptance of their
cards and ensure that their cardholders have a positive experience
with the card.
Although various options have been debated for lowering interchange
fees, removing the anti-steering rules appeared to receive the most
support from the large and small merchants and merchant trade
associations with whom we spoke.[Footnote 3] Removing these rules
could allow merchants to send signals to cardholders about which cards
increase merchant acceptance costs, which also could improve
merchants' leverage in negotiating their payment costs. The ability to
charge more for or refuse certain cards also could cause cardholders
using rewards cards to be more aware of and to bear more of the cost
of the rewards from which they benefit. If interchange fees for
merchants were lowered, consumers could benefit from lower prices for
goods and services, but proving such an effect is difficult. Lower
interchange fee revenues for card issuers could prompt them to
increase cardholder costs, offer less generous rewards, or curtail
cardholder credit availability.
Scope and Methodology:
To examine the benefits and costs associated with federal entities'
acceptance of cards, we analyzed data for executive, legislative, and
judicial branch agencies; government corporations; and other federal
instrumentalities that accept credit and debit cards for payment. FMS
processes the card transactions for the majority of executive,
judicial, and legislative branch agencies and federal commissions,
boards, and other entities and pays the associated fees for these
entities. We also reviewed data from several federal entities for
which FMS does not settle transactions: Amtrak, the U.S. Postal
Service, and others.[Footnote 4] To determine the impact on federal
entities of using cards to make purchases, we reviewed policies and
procedures developed for the General Services Agency (GSA) card
program that federal entities can use to make purchases (known as the
SmartPay program), collected and analyzed data on card use from GSA,
and reviewed our prior reports and interviewed officials from five
entities that were among those with the highest volume of card use in
fiscal year 2006. To learn about the impact of interchange fees on
other merchants, we conducted interviews with more than 80
organizations, including U.S. federal banking and other regulators,
academic researchers, and industry participants. We also interviewed
and obtained information from regulatory officials in Australia. For
this statement, we also obtained updated 2009 revenues and costs from
FMS, Amtrak, and the Postal Service, and purchases from GSA. We
conducted the work on which this statement is based from June 2007 to
May 2008, from May 2009 to November 2009, and in June 2010 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.
Federal Entities Receive Numerous Benefits Associated with Card
Acceptance, but Also Pay Interchange Fees and Other 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 that Treasury's FMS collects show that while credit and debit
card transactions accounted for 0.23 percent of the total federal
government revenues FMS collected in fiscal year 2007, its card
collections had grown by almost 28 percent in 2 years--from
approximately $5.5 billion in fiscal year 2005 to almost $7.1 billion
in fiscal year 2007 (in current dollars). Revenues that the U.S.
Postal Service and Amtrak--which have their own arrangements for
processing their transactions--collected on credit and debit cards
grew from $9.3 billion in 2005 to $11.5 billion by 2007. As shown in
table 1, the card revenues from these organizations and various other
federal entities from which we collected data grew from $22.3 billion
in 2005 to $27.1 billion by 2007.
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: FMS;
Credit and debit card revenues collected: $5.5 billion;
Merchant discount fees paid[A]: $70 million;
Average merchant discount rate: 1.26%.
Fiscal year: 2005;
Entity: NAFIs (all);
Credit and debit card revenues collected: $7.5 billion;
Merchant discount fees paid[A]: $128 million;
Average merchant discount rate: 1.72%.
Fiscal year: 2005;
Entity: U.S. Postal Service and Amtrak;
Credit and debit card revenues collected: $9.3 billion;
Merchant discount fees paid[A]: $143 million;
Average merchant discount rate: 1.54%.
Fiscal year: 2005;
Entity: Total;
Credit and debit card revenues collected: $22.3 billion;
Merchant discount fees paid[A]: $341 million;
Average merchant discount rate: 1.53%.
Fiscal year: 2006;
Entity: FMS;
Credit and debit card revenues collected: $6.3 billion;
Merchant discount fees paid[A]: $89 million;
Average merchant discount rate: 1.41%.
Fiscal year: 2006;
Entity: NAFIs (all);
Credit and debit card revenues collected: $8.3 billion;
Merchant discount fees paid[A]: $139 million;
Average merchant discount rate: 1.67%.
Fiscal year: 2006;
Entity: U.S. Postal Service and Amtrak;
Credit and debit card revenues collected: $10.4 billion;
Merchant discount fees paid[A]: $160 million;
Average merchant discount rate: 1.54%.
Fiscal year: 2006;
Entity: Total;
Credit and debit card revenues collected: $25.0 billion;
Merchant discount fees paid[A]: $387 million;
Average merchant discount rate: 1.55%.
Fiscal year: 2007;
Entity: FMS;
Credit and debit card revenues collected: $7.1 billion;
Merchant discount fees paid[A]: $101 million;
Average merchant discount rate: 1.43%.
Fiscal year: 2007;
Entity: NAFIs (all);
Credit and debit card revenues collected: $8.5 billion;
Merchant discount fees paid[A]: $150 million;
Average merchant discount rate: 1.75%.
Fiscal year: 2007;
Entity: U.S. Postal Service and Amtrak;
Credit and debit card revenues collected: $11.5 billion;
Merchant discount fees paid[A]: $182 million;
Average merchant discount rate: 1.58%.
Total:
Credit and debit card revenues collected: $27.1 billion;
Merchant discount fees paid[A]: $433 million;
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 - 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 the volume of revenues from card payments have increased, so have
the total amounts of merchant discount fees paid by the federal
entities from which we collected data. These federal entities reported
paying 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 fiscal year 2005. The average merchant discount
rate increased about 4 percent from fiscal year 2005 to fiscal year
2007. Since we originally reported, total card revenues for the U.S.
Postal Service and Amtrak rose to $12.4 billion and those for FMS rose
to $8.6 billion in fiscal year 2009; the card acceptance costs for the
Postal Service and Amtrak grew to $203.7 million and for FMS to $116
million.
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).[Footnote 5] The three
entities paid approximately $205 million in interchange fees during
fiscal year 2007, out of a total of $218 million in merchant discount
fees specifically for MasterCard and Visa transactions.[Footnote 6]
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 the 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).
In our most recent report on interchange fees issues, we reported that
non-federal merchants also were experiencing increasing card
acceptance costs, which they largely attributed to increased volumes
of payments being made by consumers with cards, but also as a result
of customers' increased use of rewards cards. Staff from these
merchants expressed concerns that the increasing use of rewards cards
was increasing merchants' costs without providing the commensurate
benefits of increased sales.
For some payments made using cards, the government does not bear
merchant discount costs.[Footnote 7] For example, consumers can pay
their income and business taxes to the Internal Revenue Service (IRS)
using cards. IRS has agreements with two private third-party entities
to process payments for individuals or businesses that choose to use a
credit or debit card to make a tax payment. The private entities
charge a convenience fee of 2.49 percent of the total tax payment, a
portion of which covers the merchant discount fees the entities pay to
their acquiring banks. 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. 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. For example, entities must pay for
point-of-sale terminals, keypads for PIN debit card transactions,
computers, modems, and printers, and pay for their installation and
maintenance. Other costs of accepting cards include complying with
industry security standards, training employees to process and
reconcile card transactions, and experiencing losses associated with
fraudulent use of cards. However, some entities provided information
that indicated these additional costs were not significant compared to
merchant discount fees.
Federal Entity Officials Cited Various Benefits from Accepting Cards:
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.
Federal officials with whom we spoke mentioned benefits such as
improved customer satisfaction with their organizations because
consumers liked to use their cards for convenience, credit card reward
programs, and security reasons. Accepting cards also has enabled
entities to conduct business through 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 their 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 reduced 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 could 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 were deposited in accounts faster when customers use credit or
debit cards than when they used checks. Additionally, Amtrak officials
told us that accepting cards on trains for ticket, food, and beverage
sales resulted in fewer instances of employee theft of cash.
Finally, many officials cited that card acceptance improved internal
operations. 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 involved less paperwork (for
reconciliation) than other payment forms. Defense Commissary Agency
(DeCA) officials also stated that they believed that the labor
associated with reconciling sales declined as a result of the reduced
cash volume. The officials mentioned additional operational
efficiencies, including reductions in costs and exposure to fraud and
errors from misplacing or miscounting cash and checks. Some officials
stated that the efficiencies gained 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 accepting cards at automated kiosks allowed them to
reallocate some staff that used to collect entrance fees. Amtrak
officials also stated that customers' ability to purchase tickets
using cards, especially through the Amtrak Web site, has reduced their
labor costs.
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 8]
Card Usage by Federal Entities Provides Numerous Benefits, but Creates
Control Challenges:
In addition to accepting cards as payment, federal entities are also
users of credit cards. 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. 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 in goods and services,
and since we originally reported this amount has grown to $30 billion
as of fiscal year 2009. Most of this spending occurred using purchase
cards, which account for nearly 70 percent of total federal entity
card spending, while travel card use accounts for about one-quarter of
card spending, and fleet card use about 5 percent.
Card use by federal entities is expected to continue growing as the
entities identify additional ways of using cards and use new payment
technologies. For example, officials from the Department of Veterans
Affairs (VA) told us that they have been working with the bank that
issues the department's purchase cards to find new ways to increase
card usage. For example, in 2003 they developed a process for making
payments through the card system to non-VA medical providers for
services to veterans who were unable to visit a VA center for medical
care, reducing the number of checks they issued and increasing the
number of electronic payments they made and the rebates they received
for using their cards. Additionally, officials stated that VA has been
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--the
follow-on to SmartPay--will lead to increases in overall card
spending. These products include prepaid cards, contactless cards, and
cards in foreign currencies.[Footnote 9]
According to federal entity officials with whom we spoke,
administrative cost savings are one of the primary benefits associated
with card usage--compared with procurement methods that cards
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. However, when government entities use a card,
cardholders can purchase goods or services directly, review their
statements at the end of the billing cycle, and forward the statements
to approving officials. Officials from the Department of Agriculture
said that if cards were not used, staff would need to complete
purchase orders for 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 from
four to five times the current number of staff to operate its travel
card program if the agency 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,
might further reduce the costs of administering their program.
Federal entities receive another benefit of card use through rebates
from the banks that issue their cards. Rebate amounts, after adjusting
for inflation, had almost doubled since fiscal year 2002 to $175
million in fiscal year 2007, and were $255 million in fiscal year
2009. Rebate amounts to federal entities 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 negotiate with
their issuing banks for additional amounts. From 1998 through 2007,
the minimum rate was 6 basis points of the net volume of spending on
the cards, while under SmartPay 2, the minimum rebate rate increased
to 8 basis points. 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, some entities have
negotiated for specialized services rather than increased rebate
amounts, and GSA encourages entities to examine their programs
holistically when negotiating terms. 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 at the federal entities with whom we met cited only a few
drawbacks associated with the use of cards, although officials from
some entities mentioned the risk of fraud and misuse. These officials
told us that the risk of fraud or abuse was less than or equal to that
under previously used procurement systems. Although 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 the
most part, fraud and misuse can be limited through strong internal
controls in card programs of federal entities. GSA and the Office of
Management and Budget (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. Finally, officials from some of the
federal entities told us that the tools and data that their card-
issuing banks provided helped them reduce the risk of misuse of cards
by enabling them to track and limit the types of purchases made on the
cards.
Federal Entities Have Worked to Reduce Card Acceptance Costs, but
Efforts to Negotiate Lower Interchange Fees Have Had Limited Success:
As card acceptance has grown, federal entities have used several
methods to manage their costs and reduce the fees associated with card
transactions. First, both Visa and MasterCard have a designated
merchant category for federal entities, in which the interchange rates
are lower than those for many other merchant categories. 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 for a Visa consumer credit card,
1.43 percent plus $0.05. (In comparison, the interchange rate for 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 DeCA transactions qualify to be processed using
the interchange rate for 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.
Because 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 (which embossed paper
receipts) with wireless card terminals on trains, they were able to
significantly reduce the interchange rates that applied to
transactions made on trains, because the electronic transaction
qualified for a lower interchange rate than the paper transactions.
Moreover, FMS officials explained that their acquiring bank was
responsible for monitoring how card transactions were processed and
the interchange rates assessed. 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.
Several federal entities have attempted to control fees associated
with card acceptance by expanding their ability to accept PIN debit
card payments. PIN debit transactions generally are assessed lower
interchange rates than "signature" debits, and therefore some federal
entities are beginning to put in place the technology necessary to
accept these transactions. While federal entities would have to
purchase 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 can 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 has been developing a new terminal system
for card collections, and as part of this process, FMS has encouraged
the entity to implement a system that can process PIN debit
transactions. Additionally, some of the military NAFIs with which we
spoke adopted technologies for accepting PIN debit cards, stating that
they too recognized the cost savings associated with these
transactions.
Federal Entities Have Had Limited Success in Negotiating Lower
Interchange Fee Costs:
Federal entities have acted to reduce card acceptance costs 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 largest card
networks--MasterCard and Visa--for lower interchange rates. One of the
primary ways of negotiating lower rates would be to refuse to take a
particular network's card. However, many of the federal entity
officials 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 accounted for about 85 percent of their sales and
that if they did not accept cards, ridership would decline
significantly. Some federal entities stated that they have attempted
to negotiate, but 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
were included in rate determinations did 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 believed lower
interchange rates should be applied to their transactions for the
following reasons. First, the Postal Service estimated that it has
been one of the top U.S. merchants in terms of card transaction
volume. Second, it poses less risk of fraud than some other merchants
because most of its transactions are face-to-face. Third, the Postal
Service operates a large retail network with 35,000 offices, self-
service terminals, mail and phone orders, and 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 services to the card networks were not reflected
in the interchange rates for Postal Service transactions. The
officials did state that they have had some limited success in
negotiations, 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 or for additional marketing efforts; however,
confidentiality agreements bind the details of the negotiations, which
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, factors they
consider when setting interchange rates include whether the industry
or sector represents a new market for credit and debit cards.
According to these officials, government payments are a market in
which they hope to increase card acceptance and transaction volumes;
thus, the interchange rates that they set for government transactions
are lower than those of many other merchant categories. Additionally,
officials at MasterCard and Visa told us that opportunities exist for
merchants, including federal entities, to negotiate for lower
interchange rates. For example, the MasterCard officials cited an
instance in which, in response to rapidly rising gasoline prices, they
worked with gasoline merchants to develop a cap on the interchange
fees for petroleum purchases. Officials from both networks explained
that they have staff dedicated to developing customized arrangements
with merchants and that these negotiations involve identifying
mutually beneficial arrangements. 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 compared with other large merchants.
Merchants Similarly Have Had Limited Success in Reducing Their
Interchange Fee Costs:
In our most recent report on interchange fee issues, we reported that
merchants had had similar difficulties in negotiating lower
interchange fee rates. We found that merchants did have greater
ability to lower the processing fee portions of their merchant
discount fee as the result of greater competition among banks offering
such services. Increased competition for acquiring services provides
merchants with considerable choice and opportunities to negotiate and
lower some card acceptance costs. Hundreds of financial institutions
and other firms compete as acquirers to provide card processing
services. Merchants of varying sizes that we interviewed reported that
they have multiple acquiring banks and processors competing for their
business and have been able to lower the acquiring fee portion of
their merchant discount fees in recent years.
Although merchants have reported success in negotiating their
acquiring costs, several of the merchants we interviewed told us that
their ability to lower their interchange fee costs--which represents
the bulk of their card acceptance costs--was limited. These merchants
generally paid the rates listed in the Visa and MasterCard networks'
default interchange fee schedules. Although the ability to refuse to
accept Visa and MasterCard should provide merchants with the leverage
to negotiate lower interchange fees, merchants reported that they
could not refuse to take such cards because of customer demand. For
example, some merchants told us that if they did not accept credit
cards from Visa or MasterCard, their sales would decrease and they
would lose business to competitors that did accept those cards.
Without this ability, merchants told us that they generally have not
been very successful in obtaining meaningful reductions in Visa and
MasterCard interchange fees. According to staff from Visa and
MasterCard, their networks are willing to negotiate with merchants.
For example, officials from one network told us that their network has
negotiated with merchants with sales that represented 26 percent of
their overall processing volume. Only one of the large merchants we
interviewed told us that their company had received a limited and
temporary reduction in their interchange fee costs as a result of
negotiations with Visa or MasterCard following the settlement of a
lawsuit.
Card Network Rules Are a Major Factor Limiting Card Accepters' Ability
to Negotiate Lower Interchange Fees:
Card network rules also limit the leverage that federal entities and
merchants have to negotiate lower interchange fees. Each of the major
card networks--Visa, MasterCard, American Express, and Discover--has
various card acceptance rules--generally known as anti-steering rules--
that limit the options that card accepters have for accepting or
denying cards.[Footnote 10] These rules include:
* no surcharges--card accepters may not impose a surcharge on
consumers for the use of credit cards or cards with higher interchange
fees;
* honor all cards--card accepters are required to accept all credit
cards within a network's brand;
* no discrimination/differentiation--card accepters may not
differentiate between credit cards within a network nor discourage the
use of cards within a network;
* no minimum or maximum charges--card accepters may not impose a price
floor or price ceiling on credit card transactions; and:
* preferred treatment--card accepters may not direct consumers away
from or to a certain network's cards.
Some academic researchers and merchant representatives argue that
these rules constrain card accepters' ability to limit the costs of
credit card acceptance. For example, without the ability to surcharge
for credit cards generally, for a particular network's cards, or for
higher interchange fee cards, card accepters, including federal
entities, are unable to steer customers towards lower-cost forms of
payment or recoup some of their costs for higher-cost cards. In
addition, without the ability to influence customers' payment choices,
card accepters are unable to use their influence with the networks to
encourage them to lower interchange and other fees in general, or
offer more lower-fee cards. In contrast, representatives of issuers
and card networks told us that the network rules are designed to
promote the wide acceptance of their cards and ensure that their
cardholders have a positive experience with the card.
Removal of Anti-Steering Rules Seen as Improving Merchants' Ability to
Negotiate with Card Networks, but Impact of Lower Interchange Rates on
Consumers Is Unclear:
Although various options have been debated for seeking to lower
interchange fees, removing the networks' anti-steering rules was one
of the options that appeared to receive the most support from the
large and small merchants and merchant trade associations with whom we
spoke.[Footnote 11] Removing the anti-steering rules appears to have
various advantages, including providing merchants with the ability to
send signals to cardholders about which cards increase merchant
acceptance costs, a change that could improve merchants' leverage in
negotiating their payment costs. Merchants' ability to surcharge or
refuse certain cards also could cause cardholders using rewards cards
to be more aware of and to bear more of the cost of the rewards from
which they currently benefit. This option also may require the least
intervention, as merchants could decide whether to add surcharges or
refuse certain cards based on their customer mix.
Merchants told us that they have faced increased costs from accepting
credit cards in recent years, partly because of the increasing number
of customers using credit cards and partly because of the increase in
average interchange fees, particularly for higher-fee rewards cards.
With lower card acceptance costs, merchants may pass on their
interchange fee savings through lower prices to consumers; however,
the extent to which they would do so is unclear.[Footnote 12]
Representatives of merchants we interviewed told us that they
generally passed any increased costs--including the costs of accepting
credit cards--to their consumers through higher retail prices. Thus,
all their customers may be paying higher prices for goods and
services, whether using a credit card or not.
If interchange fees were lowered for merchants, consumers could
benefit from lower prices for goods and services, but proving such an
effect is difficult. For example, Australian regulators estimated that
capping interchange fees in their country resulted in lower
interchange fees for their merchants by about 1.1 billion Australian
dollars for the period of March 2007 through February 2008. They
acknowledged that providing conclusive evidence of the extent to which
these savings have resulted in lower retail prices was difficult
because so many factors affect prices at any one time. Moreover, the
degree of savings depended on whether or not merchants were increasing
their prices because of higher interchange fee costs. Some merchant
representatives we interviewed told us that merchants would take
different steps to improve customer service if interchange fees were
lowered, such as hiring more employees. Customers also might not
experience lower prices if merchants' overall costs did not decrease.
Several industry participants speculated that if merchants were
allowed to refuse higher-cost cards, merchants would lose sales from
customers using premium credit cards. Network and issuer officials
told us such customers spend more than customers using basic credit
cards. A study of the Australian reforms by several economists
reported that because the actual decrease in merchant costs was very
small, merchants may have hesitated to lower prices, especially when
their other costs might have been changing.[Footnote 13]
Lowering interchange fee revenues for issuers could prompt issuers to
increase cardholder costs or curtail cardholder credit availability.
In Australia, issuers reduced rewards and raised annual fees following
that country's interchange fee cap. In addition, with less interchange
fee income, representatives of smaller issuers such as community banks
and credit unions told us that they likely would not offer rewards
cards and therefore would be unable to compete with larger issuers.
One credit union official told us that the credit union could not
offer credit cards because of the expense involved with running such a
program. In addition, representatives of credit unions and community
banks we interviewed said that they benefited from a network system
that developed interchange rates to attract both merchants and
issuers. Allowing merchants to refuse certain cards or negotiate rates
directly with the issuers would eliminate smaller institutions from
the process. Representatives of larger issuers told us that with less
revenue from interchange fees, they would consider reducing the amount
of credit they make available to cardholders. Australian officials
reported that since their reforms were instituted, the number of
credit card accounts in Australia has continued to increase and
smaller credit unions have remained in the credit card business,
albeit with some of their operations outsourced.
Banks' lower interchange fee revenue and the removal of certain anti-
steering rules could also negatively affect federal entities. For
instance, a GSA official told us that banks facing reduced interchange
fee revenue might reduce the amount of rebates federal entities
receive for using purchase cards. In addition, he said that the "honor
all cards" rule ensures universal acceptance of GSA purchase cards--an
important consideration for timely purchase of goods for first
responders.
Although interchange fees are not regulated at the federal level in
the United States, these fees and card network rules, including the
anti-steering rules, have been the subject of various actions by
foreign regulators, the Department of Justice (DOJ), and private
litigation. The Federal Reserve, under the Truth in Lending Act, is
responsible for creating and enforcing requirements relating to the
disclosure of terms and conditions of consumer credit, including
credit cards, but because interchange fees are paid by merchants'
banks and not directly assessed to consumers, such fees are not
required to be disclosed to consumers. Although not specifically
regulating credit card interchange fees, DOJ and the Federal Trade
Commission have jurisdiction over credit card networks and issuers as
part of enforcing U.S. antitrust laws or the Federal Trade Commission
Act. In 1998, DOJ sued Visa and MasterCard for alleged antitrust
violations regarding, among other things, how these networks' rules in
effect prevented issuers from issuing cards on competitors' networks.
[Footnote 14] DOJ officials reported that they currently have another
investigation under way involving potentially anti-competitive network
rules such as those that prevent merchants from steering customers to
other forms of payment, levying surcharges for card transactions, or
discriminating against cards by type. DOJ staff told us they have
requested information from American Express, Discover, MasterCard, and
Visa as part of this investigation. They were not able to provide an
estimate for when any formal action resulting from the investigation,
if any, might occur. Interchange fees and other card network practices
also have been the subject of private lawsuits. Since the mid-1980s,
various lawsuits alleging problems with interchange fees and other
card network practices have been litigated or remain pending.
In addition, as of September 2009, more than 30 countries have acted
or are considering acting to address competition or card cost concerns
involving payment cards.[Footnote 15] Some actions taken by these
countries include:
* regulating relationships between merchants, issuers, and card
networks, such as prohibiting card networks from imposing certain
rules on merchants;
* establishing maximum interchange fees or capping average interchange
fees;
* allowing more institutions to enter the credit card market by
changing the requirements to allow more institutions to qualify to act
as an issuer or acquirer; and:
* conducting investigations into the functioning of the payment card
market, including legal antitrust proceedings.
Federal agencies accept cards and pay the associated costs. They also
use cards and obtain various benefits as a result. Efforts to reduce
interchange fees by addressing anti-steering rules could lower federal
entities' interchange fee costs. If interchange fees were lowered,
consumers and federal entities might benefit from lower prices for
goods and services, but lower interchange revenues for card issuers
could prompt them to increase cardholder costs, offer less generous
rewards, or curtail cardholder credit availability, although consumers
and federal entities could still enjoy various other benefits of using
cards, such as convenience and efficiency.
Mr. Chairman and Members of the Committee, I appreciate the
opportunity to discuss these critically important issues and would be
happy to answer any questions that you may have. Thank you.
[End of section]
GAO Contact and Staff Acknowledgments:
GAO Contact:
Alicia Puente Cackley. 202-512-8678 or cackleya@gao.gov:
Staff Acknowledgments:
Cody Goebel, Assistant Director; Michael Aksman; Jessica Bryant-
Bertail; Rudy Chatlos; Katherine Bittinger Eikel; Isidro Gomez; Nathan
Gottfried; Christine Houle; Yesook Merrill; Marc Molino; Rachel Munn;
Barbara Roesmann; Paul Thompson; Ann Marie Udale; Patrick Washington;
and Ethan Wozniak made key contributions to the work on which this
statement is based.
[End of section]
Footnotes:
[1] See Credit and Debit Cards: Federal Entities Are Taking Actions to
Limit Their Interchange Fees, but Additional Revenue Collection Cost
Savings May Exist, [hyperlink, http://www.gao.gov/products/GAO-08-558]
(Washington, D.C.; May. 15, 2008), and Credit Cards: Rising
Interchange Fees Have Increased Costs for Merchants, but Options for
Reducing Fees Pose Challenges, [hyperlink,
http://www.gao.gov/products/GAO-10-45] (Washington, D.C.; Nov. 19,
2009).
[2] Dollar values on the costs and revenues associated with card
acceptance for fiscal years 2005 through fiscal year 2007 are current
values and have not been adjusted for inflation.
[3] See [hyperlink, http://www.gao.gov/products/GAO-10-45]. The
merchants and associations also supported restricting interchange fees
with a cap or other limit.
[4] These other entities included nonappropriated fund
instrumentalities (NAFI) of the Department of Defense and Department
of Homeland Security which operate retail stores or recreational
facilities for the military. 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.
[5] Merchants (or federal entities) enter into relationships with
acquiring banks to provide card processing services for Visa or
MasterCard (or both).
[6] This estimate for interchange fees paid includes fees associated
with debit transactions using personal identification numbers (PIN) 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.
[7] 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.
[8] David B. Humphrey and Allen N. Berger. "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, (Boston: Kluwer Academic Publishers, 1990). 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, 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, 2, no. 2, (2003).
[9] 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.
[10] Not all of the networks have each of these rules, but if a
merchant accepts cards from each of these networks, they are subject
to all of them. Visa, MasterCard, and American Express have posted
some of their rules on their Web sites; Discover's rules are not
available online.
[11] See [hyperlink, http://www.gao.gov/products/GAO-10-45]. The other
option that was most supported was restricting interchange fees with a
cap or other limit.
[12] For example, Federal Reserve economists told us that the extent
to which merchants would pass on their interchange fee savings likely
would depend on the competitiveness of the markets in which the
merchants operate.
[13] See Howard Chang, David S. Evans, and Daniel D. Garcia-Swartz,
"The Effect of Regulatory Intervention in Two-Sided Markets: An
Assessment of Interchange-Fee Capping in Australia," Review of Network
Economics, 4, no. 4 (December 2005).
[14] See United States v. Visa U.S.A., Inc., 344 F.3d 229 (2d Cir.
2003), aff'g,, 163 F . Supp. 2d . 322 (S.D.N.Y. 2001), Cert. Denied,
543 U.S. 811 (2004).
[15] Federal Reserve economists and others report that these countries
include Argentina, Australia, Austria, Brazil, Canada, Chile,
Colombia, Denmark, Finland, France, Germany, Hungary, Israel, Italy,
Mexico, New Zealand, Norway, Panama, People's Republic of China,
Poland, Portugal, Romania, Singapore, South Africa, South Korea,
Spain, Sweden, Switzerland, Turkey, and the United Kingdom, as well as
the European Commission. See Terri Bradford and Fumiko Hayashi,
"Developments in Interchange Fees in the U.S. and Abroad," Payment
System Research Briefing (Federal Reserve Bank of Kansas City,: April
2008); and [hyperlink, http://www.gao.gov/products/GAO-08-558].
[End of section]
