November 19, 2009

WASHINGTON DC – A study released today by The Hispanic Institute and University of Pennsylvania Visiting Scholar and economist Dr. Efraim Berkovich confirms that the costs of credit and debit cards are unfairly distributed in the United States today. “This study found that there is a massive wealth transfer caused by credit and debit card industry pricing policies in which the poor pay higher prices to subsidize the most affluent Americans,” according to Berkovich.

“Hidden credit card interchange fees, also known as swipe fees, have created a ‘Reverse Robin Hood’ situation in which Visa, MasterCard and major banks winwhile everyday Americans lose,” said Gus West, Chairman of The Hispanic Institute, which sponsored the research. Using a very conservative set of estimates, this report found that through imposing swipe fees on every transaction paid by plastic and requiring those fees to be buried in prices to consumers, the credit card industry ensures that the top 10% of Americans get at least $354 million in frills while the bottom tier pays at least $669 million more than they should. These very conservative estimates likely understate the billions of dollars that lower income Americans transfer to higher income Americans every year because of hidden credit and debit card fees on goods and services of every type including necessities of life such as gas, groceries, and clothing.

“Credit and debit card pricing is deliberately built upon a maze of hidden fees which hurt Hispanics and lower income Americans more than others,” according to West. “Why should the poor pay higher prices so that Visa Premium or American Express Platinum cardholders get concierge services and preferred tee times?”

Congressman Luis V. Gutierrez (IL-4) said, “I commend the important work of The Hispanic Institute in looking at the potentially discriminatory effects of these practices by the credit card industry. All Americans, especially lower income and minority individuals, should not be forced to pay hidden fees to subsidize credit card issuers. The concerns raised in this report certainly merit continued Congressional attention.”

“Almost every day, I hear about new tricks that credit card companies are using to take advantage of hard working consumers, and gouging small businesses is a prime example,” said Representative Linda Sánchez (CA-39).  “Hidden credit card interchange fees can inflate the cost of nearly everything consumers buy, even when they pay cash, and small businesses should have a greater opportunity to negotiate fair fees.”

This report found:

• The current structure of the credit card system requires lower income and disproportionate numbers of minority consumers to transfer billions of dollars to higher income and disproportionate numbers of non-minority consumers.
• Total money transferred in the United States due to swipe fees and rewards is about $1.4b to $1.9b on gas and groceries alone.
• The bottom 50 percent of income earners pay at least $669 million more than they should and the top 10 percent of earners receive at least a $354 million subsidy.
• Card rewards accrue disproportionately to wealthier households even after adjusting for spending.
• Consumers with high school diplomas paid more to subsidize people with advanced degrees.
• Minority households paid more to subsidize non-minority households.
• Households without a bank account subsidize households with access to banking services.

The study conclusively demonstrates that consumers pay swipe fees. As card costs have risen, operating profits for merchants have remained stable or slightly declined. Consumer prices have moved in lockstep with swipe fees. “Since 2001, card costs and the sales price of fuel have increased. However, the operating profits of the merchants cyclically fluctuated with the market. In fact, linear projections show that the operating profits of merchants are actually declining, while the cost of cards continues to rise and reward the credit card industry with profits,” said Berkovich.

The problem is not just reward cards are heavily, if not entirely, financed through interchange fees,” Berkovich said, “it is that credit card pricing policies reward the affluent while the poor bear the cost.

“This study demonstrates that credit card companies have secretly rigged the system so that everyday Americans lose out to those who enjoy top incomes; it also suggests that‘unbanked’ Americans, including disproportionate numbers of Hispanics, who don’t have cards are hurt the most by swipe fees,” said West.

This study confirms the findings of Kansas City Federal Reserve senior economist Fumiko Hayashi in a paper published in December 2006 (“Pricing and Welfare Implications of Payment Card Network Competition”. She analyzed similar trends concerning how the credit card system has been designed to ensure less affluent consumers subsidize wealthier ones. She concluded, “Higher merchant fees may likely harm society from an equity point of view.”

The report titled “Cross-Subsidization of Consumers in the Payment Card Market,” is based upon primary research analyzing the gasoline and grocery purchase behavior of American consumers and is available online at www.thehispanicinstitute.org

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For More Information, Contact
XiNomara Velazquez Yehuda
The Hispanic Institute
(202) 544-8284
xinomara@thehispanicinstitute.net