Thursday, June 10, 2010

Ending the Corporate Card Subsidy

The current system of card transaction fees is not just a big mess — it is a hidden tax on consumers and a subsidy for the big corporations.

It isn’t something you’ll hear much about, but there is a back-room deal between the banks and the big corporations that allows the banks to take some of your money and pass it along to the corporations.

Whenever you buy anything and pay with a credit or debit card, the merchant you’re buying from doesn’t get all the money. The banks keep a share of it, typically about 2.5 percent, more than enough to cover their costs in processing the transaction.

Here’s the trick, though. The banks’ share of the transaction is different for different cardholders. Sometimes the bank pays a little bit more to the merchant, and sometimes it pays a little bit less.

And the bank doesn’t keep all the money it collects in transaction fees. It pays some of the money back to the cardholder, in a payment that might be called a rebate, though really it’s a kind of a kickback.

Now, guess which cardholders get the biggest kickbacks?

If you guessed the biggest, richest business enterprises in the world, you would be right. Rebates aren’t just gimmicks for corporate card accounts — they’re a serious amount of money. As one bank puts it in an advertisement for its corporate card, “Turn everyday corporate expenses into maximum corporate savings.”

That advertising phrase isn’t exactly accurate. It isn’t really just the corporate expenses that are being turned into “maximum corporate savings.” It is everyone’s expenses that are producing this effect.

That’s because banks don’t pay merchants as much for corporate card purchases as they do for any other card purchases. For corporate card purchases, the bank pays about 1 percent less, taking a fee from the merchant of about 3.5 percent instead of about 2.5 percent.

But the bank doesn’t necessarily keep that extra 1 percent for itself. The money goes directly to the big corporations in the form of rebates, or kickbacks, on their corporate card accounts.

What this means to you, if you don’t qualify for a corporate card, is that you’re paying extra.

Banks are paying out billions of dollars every day to big corporations, and to cover the cost of this, consumers have to pay a little bit more every time they buy anything. It’s not exactly a fair system, is it?

In a fair system, banks would charge the same transaction fees for all card transactions, regardless of who the cardholder is. They wouldn’t be using the card transaction fees to rob ordinary consumers in order to pay kickbacks to the richest business organizations in the world.

The good news, though, is that Congress may actually be doing something about this. The Senate version of the Financial Regulatory Reform Bill would put a damper on this kind of abuse within the banking industry. It’s not a big enough move to end it entirely, but it’s a step in the right direction. It remains to be seen whether a final bill will include this provision and what form the resulting regulations would take.

If the bill passes with this provision, though, it will help to establish the principle that banks cannot merely take whatever money they want just because they happen to be involved in a transaction. And it will help to bring an end to the use of card transaction fees as a hidden subsidy for big corporations and a hidden tax on everyone else.