by Joseph Kenny | 01/25/10

There are a number of nonprofits that accept credit card payments for donations today. As the marketplace continues to move towards a checkless society, charities realized they stood a better chance of increasing donations if they took advantage of debit and credit cards and online payments.



Unfortunately, what many of these charities did not realize is the high fees associated with credit card contributions. Merchants pay a fee to the credit card companies on each transaction processed. The Hispanic Institute worked with an economist at the University of Pennsylvania to determine the impact of these fees on consumer prices and were surprised at what was learned.

The Hispanic Institute discovered that the merchant fees are leading to higher prices on merchandise bought by consumers every day. The problem is that every consumer pays the higher prices including the low income of which many never use a credit card. The net result is a transfer of income from the poor consumers to the wealthier ones.

The point the Hispanic Institute report makes is that higher income people paying more for merchandise will get some of those higher charges they paid back in the form of membership benefits. Benefits may include sky miles or earned discounts on products or services. Since many low income never use a credit card and usually pay cash for goods and services, they never get any of the benefits. The low income consumer ends up paying more for goods and services due to credit card fees but gets none of the advantages credit card holders enjoy.

The Hispanic Institute estimates that up to $670 million of additional charges are paid by low income families each year to cover credit card fees. Since there is a disproportionate number of minority low income families, the credit card fees are impacting low income minority families disproportionately. The Hispanic Institute reports that 19 percent of the bottom 25 percent of wage earners are Hispanic. African Americans make up 21 percent of the his same group.

People who do not use credit cards are paying more for goods and services but without obtaining any of the benefits credit card holders get. In fact, people who do not use banks at all are called “unbanked” and they are shut out of the system of frills that other income earners enjoy. Since such a large percentage of low income earners are minority, the banking debit and credit card fees are hurting the poor.

The Credit CARD Act will not help this situation either. The Act limits when credit card fees can be raised but does not limit rates nor does it address the impact of fees on prices. Laws impacting prices would interfere with the free market system. But it is important for consumers to understand how the fee system works and the impact it has on household finances.

Charities have no choice but to accept debit and credit card payments in order to tap into the market where likely donors are found. But in doing so, they are paying part of those donations back to the credit card company.