GAO Report Sheds Light on Federal Card-Acceptance Costs

The federal government took in $27.1 billion in payments through credit cards in fiscal 2007 and paid at least $433 million in merchant discount fees, according to a new report from the Government Accountability Office, the investigative arm of Congress. Agencies that were able to break out their interchange costs collected $18.6 billion through cards in fiscal 2007 and paid $205 million in interchange. Those are two of the more significant findings from the report, which Congress requested in an effort to shed light on the costs and benefits of federal entities accepting payment cards. The report is particularly pertinent as the House of Representatives considers an interchange-regulation bill, the Credit Card Fair Fee Act of 2008 (Digital Transactions News, May 15). The following are the government's respective charge volume, merchant discount fees paid, and average discount rates for the past three fiscal years ended Sept. 30. Fiscal 2005: $22.3 billion in charge volume, $341 million in merchant discount fees, and an average discount rate of 1.53%. Fiscal 2006: $25.0 billion, $387 million, 1.55%. Fiscal 2007: $27.1 billion, $433 million, 1.60%. Those figures include payment programs supervised by the U.S. Treasury Department's Financial Management Service (FMS); the quasi-independent government entities Amtrak and the U.S. Postal Service; and stores and recreational facilities operated by the departments of Defense and Homeland Security called non-appropriated fund instrumentalities, or NAFIs. Among the three categories, Amtrak and the Postal Service had the highest charge volume all three years. Unlike higher-margin smaller merchants in the private sector, the federal entities pay relatively little in card-acceptance costs beyond interchange for Visa and MasterCard transactions. In fiscal 2007, FMS, Amtrak, and the Postal Service paid a combined $205 million in interchange out of a total of $218 million in merchant discount fees, according to data the agencies received from their merchant acquirers. That means interchange accounted for 94% of the discount rate. While rates vary widely across industries, interchange for small retailers may account for only two-thirds to three-fourths of discount rates. Although government transactions often qualify for lower interchange rates than equivalent transactions at private-sector merchants, interchange expenses for many federal agencies nonetheless are rising faster than charge volume. The $205 million in interchange paid by the FMS entities, Amtrak, and the Postal Service in fiscal 2007 was 36% more than the $151 million paid in fiscal 2005. (Interchange costs were $179 million in fiscal 2006). In contrast, charge volume rose 26% from $14.8 billion in fiscal 2005 to $18.6 billion in fiscal 2007. Interchange figures were not available for the NAFI entities. The report says the government receives “numerous benefits” from accepting cards. Amtrak, the national passenger-rail service, reported that about 85% of its sales are on cards and that if it didn't accept them, “the number of people who ride their trains would decline significantly.” The U.S. Department of Interior told GAO interviewers that cards reduce its cash-transport costs from remote parks and wildlife refuges. The Defense Commissary Agency reported that the labor needed to reconcile sales has declined with the reduction in cash sales. The government is trying to cut its card-acceptance costs, the report says. Amtrak has replaced imprinters with wireless card terminals in order to qualify for better interchange rates (Digital Transactions News, July 25, 2007). Other agencies are attempting to reduce the number of keyed-in transactions, which cost more than sales where the terminal reads a card's magnetic stripe. Some are adding acceptance of PIN-debit cards, which cost less to accept than credit or signature-debit cards. And the Postal Service is in the process of converting to a payment switch that would funnel data from the Postal Service's 70,000 payment terminals into one settlement file at the end of the day and route transactions to the least-cost processors. The report also examined the effects of other countries' efforts to limit interchange and the impact on government agencies of using cards for purchases. The full report can be downloaded from http://searching.gao.gov/query.html?charset=iso-8859-1&ql=&rf=2&qt=08-558&Submit=Search