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Have You Heard of the Interchange Fee?

Interchange fees cost Americans $48 billion a year.
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As if you weren't already feeling the pinch in this time of need and economic uncertainty, hidden credit and debit card interchange fees are chewing a hole in your wallet.

Never heard of interchange fees? Don't feel lonely. Most people have never heard of them and the banks like it that way. Interchange fees are a percentage of each credit or debit card transaction that goes to the banks through network providers such as Visa and MasterCard. Out of every credit card transaction no matter how big or small, your neighborhood grocer, bookstore and small business owner loses a percentage of the sale. The amount paid depends on the interchange fee set by Visa and MasterCard. Business owners have no control over the fees and most consumers don't even know that the cost of the mysterious interchange fee ends up being tacked on to the price of everything they buy.

But now I know (and so will you) that interchange fees cost Americans $48 billion a year. If you live in California, your share of national interchange fees is about $5 billion annually.

I only know about interchange fees because I am the Chairman of the California State Assembly's Banking and Finance Committee. It shouldn't take being the Chair of a legislative committee to learn about this stuff, but it does. I recently invited banks, credit card companies, consumers and business owners to a hearing on these fees. Believe me -- the people who profit the most weren't all that excited about my invite. But when I heard that American consumers pay $48 billion a year in interchange fees, I felt you had a right to know.

And guess what? Interchange fees are not regulated. Visa and MasterCard set the rates. Because of this, on every transaction Californians pay about $2 in interchange fees for every $100 transaction. The very people who have the most to gain make the rules and your local businesses have to take it or leave it.

The ten largest banks in the nation receive almost 90 percent of the interchange fee profits.

On average, consumers pay $427 annually on interchange fees without even realizing it. Business owners know about the interchange fees, but because of the complicated way they are calculated, they have to rely on a monthly statement from Visa or MasterCard to tell them how much they owe. The fees change with each and every sale because it depends on which type of credit card used. Reward cards carry the highest fees.

Merchants are left with no choice but to raise the prices on their goods and services to cover the costs. Cash customers end up subsidizing credit card users because the higher costs are now built in to every gallon of gasoline, candy bar and box of diapers sold.

By the end of the hearing, I learned that it is the small businesses who are most effected by this interchange fee. "Mom and pop" shops on every corner throughout California are losing money on too many transactions due to the customers who come in, use their card to buy a pack of gum, and request $40 in cash back. These transactions occur all too often and cost merchants money because they are not only charged a fee on the gum; they are charged a fee on the entire transaction, even cash back.

Even though California cannot independently regulate interchange fees, as a state, we should do more to shine a light on the subject. In the 2010 Legislative Session, I vow to examine all options to bring attention to this matter, stand in support of California's small businesses, and work to provide Californians with cost savings.

The federal government is considering three measures to tackle this issue. These proposals are: Senate Bill 1212 and House Resolution 2695, which would establish a process by which merchants and network providers could negotiate interchange fees and require the fee to be made publicly available; and House Resolution 2382, which would require network providers to remove constraints placed on merchants for card acceptance, such as requiring merchants to accept all cards from a particular network and would also require issuers to disclose networks fees to credit card users.

For the sake of our small businesses and our consumers, this is not an issue we can ignore. By any measure, $48 billion per year is real money, and we have to do everything we can to get some of it back into the wallets of California's hard working families.

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