GAO to Congress on Interchange Fee Regulation: Yellow Light

Last week the General Accountability Office (GAO) released it much awaited report on interchange fees. Congress had asked the GAO, the respected investigative arm of Congress, to wade into this battle between merchants and cards systems earlier this year when it passed the CARD Act. There’s something for everyone in this report which is why both merchant and cardholder advocates are claiming that it backs their positions. Here’s what GAO finds:


  • Consumers who use credit cards have benefited from competition in credit cards with lower fees and more rewards although consumers who don’t use credit cards may face higher prices because merchants pass along the cost of acceptance.

  • Merchants are paying more for interchange fees because consumers are using cards more and because MasterCard and Visa have raised some rates.

  • Merchants receive benefits from accepting credit cards but at least some merchants claim that the costs outweigh the benefits.

  • Reducing interchange fees to merchants could result in consumers paying higher fees and getting less rewards but consumers might also benefit from lower prices.


The GAO’s bottom line is: “Although various options to lower interchange fees exist, impacts on cardholders could be mixed and each option has implementation challenges.”

Although both sides can point to sound bites from the report that back their positions I think a fair reading of the GAO’s conclusion is that it presents a “yellow light” to Congress (It is more or less consistent with the warning that I gave Congress in my recent testimony). Even though it sometimes couches the findings in tentative prose the GAO seems to agree that reducing interchange fees will result in people paying more to use credit cards, having less availability of credit, and having reduced rewards. It cites the experience in Australia where there is really no controversy over the fact that fees went up and rewards went down as a result of the halving of interchange fees there. It recognizes that there’s a flip side to this. Merchants will pay less for taking cards and might pass on some of those savings to consumers. One can debate the extent to which this will happen and how long it will take but there’s widespread agreement that since we’re talking about small saving per transaction that it is almost impossible to measure and verify these benefits.

The GAO Report does not present any findings that would support the regulatory interventions being advocated by merchants and that are covered to various degrees by some of the bills winding their way through Congress. There is nothing that suggests that consumers overall will benefit from interchange fee caps. In the best of worlds reducing interchange fees will take money out of one pocket (from the higher cost to consumers for cards) and put it in another pocket (the lower cost at check out). The GAO Report mentions benefiting consumers that don’t use cards but there aren’t many such people and they don’t spend much. There is also nothing in the report that concludes that society would be better off if merchants could steer consumers to cash and checks. It seems counterintuitive that we’d be better off continuing to use paper-based payment methods that originated centuries ago rather than electronic methods.

If I were a member of Congress I’d also be pretty concerned about the GAO’s conclusions from a purely political perspective. Consumers will not perceive Congress as having done them any favors if measures to reduce interchange fees are passed. They will pay higher fees for cards and they will have their rewards slashed. They won’t notice any savings at checkout even if there are some. We already saw this movie in Australia.

Bio: David Evans


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