On May 13, the Senate voted 64 to 33 to raise the fees on your credit card.
Indirectly, of course.
Senator Durbin’s amendment to S. 3217, the “Restoring American Financial Stability Act of 2010,” limits interchange fees and mandates that they are proportionate to the charges incurred.
Interchange fees, also known as “swipe fees,” are the fees that a merchant pays to a cardholder’s bank for the cost and risk of offering credit to consumers.
Reducing interchange fees appears like you are helping small businesses and reducing the cost of credit transactions. In actually, you are forcing credit card companies to increase their fees and decrease the issuance of credit cards.
Todd Zywicki, of the Mercatus Center at George Mason University, explains it this way in WSJ:
“Credit cards are essentially a closed economic system: A reduction in interchange fees will have to be offset by increased revenues elsewhere or a reduction in costs. For example, issuers could try to increase the revenue generated from consumers through higher interest payments, higher penalty fees, or reinstating annual fees.”
Think that’s just economist hullabaloo?
According to Zywicki, when Australian regulators imposed price controls on interchange fees in 2003, annual fees went up and rewards programs went way down:
“Annual fees increased an average of 22% on standard credit cards and annual fees for rewards cards increased by 47%-77%. Card issuers also reduced the generosity of their reward programs by 23%. Innovation, especially in terms of improved security and identity-theft protection, was stalled. Card issuers also increased their efforts to attract higher-risk customers who generate interest and penalty fees to offset lower interchange revenues from lower-risk transactional users.”
Interchange fees are not just a magic fee that monopolistic card companies impose on unwitting small businesses. Interchange fees are generally the only compensation that credit card companies get for extending billions of dollars of credit to consumers.
Small businesses benefit too.
Merchants do not have to clear the transaction, insure that you have enough money in the bank to cover the cost, send you additional billings, or run the risk of having an in-house credit operation. Instead, they spend roughly 2% per credit transaction to have the banks do this for them.
Not a bad deal.
Moreover, interchange fees had absolutely nothing to do with the financial crisis. So why has interchange regulation been snuck into S. 3217?
Interchange fees have been a pet political project since 2007, when the House Judiciary Committee antitrust task force held the first hearing to study them. In other words, this is something that Congress has wanted to regulate for a long time and has never had an excuse to do so.
Now, barrages of non-germane amendments are being added to the financial regulatory reform legislation because this could be the last major legislation that the 111th Congress approves before the campaign cycle begins.
I am concerned that the decision to include interchange fees on this regulation train is ill-thought out.
As history shows us, reduced interchange fees will result in higher credit card fees, less credit card rewards, and restricted issuance.
Just because interchange fees are confusing and a type of financial product, is not reason enough to regulate them.