Friday, March 31, 2006

The Anatomy of How Visa and MasterCard Get a Cut From Charitable Donations ( commentary)

Use your Visa or MasterCard to make a donation to the American Red Cross, a local nonprofit, or even to help feed the hungry and the banks also gets a cut. There is no negotiating on interchange fees. If a wealthy contributor uses a premium affinity card, which merits free airline miles, then not just the donor, but the charity is also taken on a ride.

From just one story shared with us: After toiling for weeks to prepare for a major gala fundraiser which raised nearly $50,000 for a nonprofit organization, the bank-owned credit card associations also attended the affair - in a big way. An associate from a local foundation explained that their directors were livid when the bill came due. After all the work invested to raise the much needed funding, about $1,200 was taken off the top to pay for the bank interchange fees. Remember, this was a nonprofit which had to pay the banks in order to provide a card payment option.

Because foundations understand that convenience and simplicity help expedite contributions, they must accept Visa and MasterCard. However, unlike all the other service providers, they are unable to negociate their rates. What the donors and organizations may not realize is that a high percent of the proceeds are paid in interchange fees. For automatic monthly donations, an interchange fee is paid every month. For non-electronic transactions which require manual card imprints, the fee could be four or five percent of the total transaction. Or, much greater when premium cardholders contribute.

In this case, the bank offered the group free checking and free use of the credit card equipment, but they still charged about $1,200. Think of how vital $1,200 would have been for the nonprofit and how it instead was used to fund the banks multibillion dollar interchange scheme. But, the bank was benevolent. They did offer the group free checking, which may otherwise cost, what, five-dollars a month? And, they kicked in a free card terminal. Freakishly, that almost sounds like what an unscrupulous person selling illegal drugs might do; provide free needles but charge for the fix.

Last Summer, immediately after the Hurricane Katrina disaster, we contacted MasterCard and Visa’s CEO to request that they rescind the interchange fees for donations to the relief efforts, as otherwise the banks were profiteering from this national calamity. In the same request was a plea to also rescind the interchange fees motorists pay when filling up their cars. Gas prices had doubled and threatened our economy. Why should Visa and MasterCard have reaped windfall profits and taken advantage of our fiscally ruinous energy crisis? Just as with donations to non profits, the banks were silent in action on arresting interchange fees for these categories.