-- by Gus K. West, The Hispanic Institute Chairman, in The Providence Journal:
The nonprofit that I run has started accepting charitable donations made with credit cards. This seemed like a smart move, convenient for us and easy for our donors, until we noticed the big fees that the credit-card companies were taking from each transaction. The fees — known as credit-card interchange fees, or more popularly as swipe fees — are unfair to us and deceptive to the donors.
The credit-card industry took $48 billion in swipe fees last year, triple the amount it grabbed in 2001, from retail purchases, charitable donations and other transactions involving credit and debit cards.
Although that is an obscene amount of money, I might have just chalked it up to the cost of doing business, but then I learned how the system works. The banks that issue Visa or MasterCard (the biggest players in this game) all charge fees to charities and businesses that take their cards. The card-issuing banks have aggressively raised their fees. They have also offered consumers rewards or other incentives to encourage frequent use of the cards.
The most insidious aspect of the way credit-card companies do business is that they require merchants to embed the fees in the prices posted for consumers. Thus, many Americans who make purchases with cash, because they are struggling financially and have limited access to credit, end up paying these fees, too.
This is especially troubling as unemployment continues to rise for all Americans, and disproportionately so for minority groups. According to a recent report by the Washington-based Economic Policy Institute, Latinos have unemployment at 1.5 times the rate for whites, and African-Americans are unemployed at twice the rate for whites.
Not only that, but these big swipe fees drive predatory lending by the credit-card industry. With swipe fees this large at stake — more than late fees, over-limit fees, cash advance fees, and ATM fees combined — the credit-card industry has done everything it can to tempt people to get more cards and use them, even when they know that some people cannot afford them.
This is what Professors Ronald Mann of Columbia University and Adam Levitin of Georgetown University have referred to as the “sweatbox” lending model. The sweatbox model is one in which credit-card banks make riskier and riskier loans to get more people into debt, then the banks squeeze fees and monthly payments out of consumers who are perpetually trapped in the sweatbox.
We are now seeing the systemic problems for our economy when lenders have too many incentives to engage in risky and predatory lending. Mortgages have provided the biggest example, but defaults on credit card loans have been and will continue to be a large contributor to our financial mess. We just can’t count on the banks to know when they have gone too far for their own good.
In its blind pursuit of more and more fees, the credit-card industry has managed an almost unique trifecta of hurting American consumers, hurting itself and hurting the overall economy. If there has ever been time for dramatic change, it is now.
Although I may never get back the fees my little nonprofit has paid on our credit-card donations, maybe we can fix this broken system so that we don’t all keep suffering.
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