The National Retail Federation told state attorneys general this week that hefty interchange fees have changed the credit card industry in much the same way lucrative origination fees changed the home mortgage industry and contributed to the current recession.

"We know that one of the causes of our current financial crisis is that the business model with respect to mortgage lending shifted," NRF Senior Vice President and General Counsel Mallory Duncan said. "Rising interchange has caused the same thing to happen in the credit card market."

"As a result, it is just as much in the banks’ interest to get as many cards into consumers’ hands to collect the interchange fees as it was for banks to get mortgages issued to collect the origination fees," Duncan said. "The piles of pre-approved credit card offers in your mailboxes attest to that. Unless we can bring market forces to bear on that incentive, it will only grow."

Duncan spoke Tuesday at the annual spring meeting of the National Association of Attorneys General in Washington during a panel discussion on credit card issues called "The Credit Card Crisis – The Next Shoe to Drop?"

Duncan said credit card issuers used to focus primarily on whether a cardholder could afford to repay the amount charged on a card and made most of their money off the interest. But with interchange bringing $48 billion a year to Visa and MasterCard banks and other consumer fees providing revenue, "it doesn’t matter whether you carry a balance – the card fees alone generate a huge revenue stream."

Interchange is a fee averaging close to 2 percent that is collected every time a credit card is used, giving the issuing banks the equivalent of 24 percent annual interest even if card balances are paid in full each month, Duncan said.

Duncan said the shift is similar to the way in which banks once held mortgages for their full 30-year terms and depended on interest for a profit. Today, however, mortgages are sold off to other institutions almost as soon as they are issued, and the issuing bank or mortgage broker makes its money from origination fees regardless of whether the borrower ever repays the loan. Many critics have argued that the practice has encouraged banks to make loans with less regard to the borrower’s ability to pay, leading to the massive number of defaults seen in the past two years.

Duncan argued that interchange practices violate federal antitrust law because banks historically have agreed to charge the same rates for each type of Visa or MasterCard card. Several class-action lawsuits seeking damages are pending in U.S. District Court, but Duncan hinted that state attorneys general should seek action, saying "what we really need" is an injunctive solution ending the practice brought by "plaintiffs not motivated primarily by a monetary return."