Senators Dick Durbin (D-IL) and Roger Marshall (R-KS) have re-introduced their bill to crack down on credit card interchange. That’s the cost businesses pay to accept credit cards.
Since banks and card networks like Visa and Mastercard make money on each transaction, they spend money to encourage those transactions. That’s what funds credit card rewards. It’s even to a large extent what funds the airlines, when carriers like American often don’t make money flying planes but ultimately earn money selling their miles to banks. Reducing interchange reduces card rewards.
Of course if that were somehow good for the world, it would be tough to argue for our miles and points. But it isn’t good for the world. Countries that have capped interchange haven’t seen prices fall to consumers. Consumers are used here a fig leaf for retailers who want to lower their costs – even though it’s already less expensive to accept cards than it is to accept cash, and consumers paying by card spend more.
- Corporate welfare for retailers. Merchants benefit from taking credit cards. Credit cards are less expensive to process than cash (staff make incorrect change and pocket cash for themselves, large cash transactions can drive up insurance rats) and credit card customers spend more. Large merchants want lower costs, and want government to do the work for them.
- Doesn’t benefit consumers. When the Durbin amendment limited interchange for debit cards prices did not fall according to research from the Federal Reserve. When Australia capped credit card interchange, prices did not fall. In fact the government of Australia allowed merchants to charge customers the cost of interchange. Prices rose, and the government had to step in to limit how much merchants imposed for these new costs because they were gouging customers.
- Bad for the economy. Capping interchange hurts the economy. When credit cards are less profitable, card issuers invest less putting them into the hands of consumers. Card annual fees also rise, as they have in Australia. And availability of credit is crucial to growth, smoothing household spend and supporting productive investment.
I do not expect this to go anywhere. It hasn’t gone anywhere in the past, and we now have divided government. In the last Congress, its sponsors tried to tie it to a must-pass defense appropriations bill and fellow Senators didn’t go along. It’s unlikely to garner majority Republican support in the House, so probably doesn’t even come up for a vote there. And it hasn’t been a priority for this administration. President Biden served as Senator from the Banks in Delaware.
(HT: Bill S)
Unless it benefits the consumers, this law should be dead on arrival. These retailers and mfg companies are making lots of money already, and they certainly won’t pass on the savings to the consumer as you suggest. This is a quiet cost, one that most consumers don’t know about, and one that isn’t passed onto the consumer in any meaningful way, so the savings also won’t be passed on. It will just pad the bottom line at the expense of the consumer because as you point out, the benefits we see now would go away. So why should anyone except theses retailers be for it? Our country has become way to pro-business, and the consumers are suffering for it with a lack of competition and greed-flation. Here is a compromise to get this passed, start breaking up these oversized corporations and reinvigorate the competition to lower prices.
@ Gary — To put it nicely, Mr. Durbin needs to retire.
Thanks for keeping an eye on this proposed legislation, Gary. I do have one question…can you explain why “… it’s…less expensive (for merchants) to accept cards than it is to accept cash”? I’ve had merchants (in the particular cases I’m thinking of, restaurants) claim that they have to add a “credit card transaction”/”convenience” fee to cover/offset the fee(s) they incur in order to accept credit card payments.
@Jim F – accepting cash means (1) people make incorrect change, (2) staff sometimes pocket money, (3) you’ve got to go and deposit the money, (4) heavy cash businesses may have higher insurance premiums and greater robbery risk.
@ Gary
Your claims about Australia do not accord with the lived experience.
The card fees were / are added to the quoted price of the product / service.
Through the legal limitation of card fees the typical consumer is now paying LESS on the added fees at the time of transaction, thereby enjoys benefit.
Additional consumer benefit derives from cards that previously had high transaction fees such as Amex now being more widely accepted by merchants.
The cost of merchant operations such as financial management is already factored into the cost of the product / service.
Your logic is fundamentally flawed since you do not necessarily have to record a reduction in retail price for the consumer to have derived benefit.
Card issuers can still price gouge by charging exorbitant (aka 4 or 5 times the cash rate) at will for interest on unpaid beelines for those who do not pay off their cards at the end of the billing cycle.
In theory, the merchant can only charge to recoup the actual cost of the transaction – the price gouging on transaction fees has thus been curbed.
Different merchants try their luck in the way they interpret the rules, the obvious example being airlines where the fees levied may or may not be a true reflection of the actual cost of transaction.
The inability to price gouge on those transaction fees per the limits has been used as an excuse (fairly or unfairly) to reduce point earn rates on loyalty based cards. Amex Platinum offers about half the former earn / burn (transfer to airline / hotel) rate for travel based spend. Citi Prestige has collapsed from 5x to 1x or less on earn / burn (AUD) on overseas spend, etc.
It is still possible to snare excellent sign up bonuses (e.g. my wife’s Amex attracted 240,000 and my referral 50,000 MR points, albeit with a 50% loss on conversion to most airline points).
Australian frequent travellers were never as milk fed on card churn as those in the USA anyway – although SUBs are a route to accelerate point totals.
Strangely enough (perhaps for an American audience), there are many opportunities to accrue exceptional earn rates through other pathways…the focus just shifts to a more rounded approach for both loyalty program and program member…;)
@platy – your suggestion that interchange caps have been deflationary are absurd, especially considering you’re highlighting the add-on fees merchants charge for accepting card. and what you don’t mention is that the rules capping these fees were in response to merchants gouging consumers for card acceptance when those fees became permissible – a new rule to limit the damage caused by the first rule.
@Gary and &Jim F – I will add one more reason credit cards are better for restaurants and retail shops instead of cash. Numerous studies have shown people spend more when they use a credit card. If they have to actually pull out cash they think more about it and sometimes limit purchases. Psychologically it is much easier to accept just signing a credit card receipt than pulling money out and paying for something.
I hate the add on credit card fees but have come to accept them as they become more common. Not sure they will ever go away.
@ AC – Bingo.
They have nothing better to do than to keep taking away from people.
Most of my local retailers/food establishments in NY now charge 3-4% more for Credit cards on the same transaction. Gas stations have been doing this for years as well.
I have traveled the world on points and traveled in classes of service that I never would have paid full price for.
Every year the points programs devalue dramatically. We’ve already seen the beginning of the end…It’s only a matter of time until they become the S&H Greenstamps of yesteryear.
Until then, travel on….
Unfortunately, Gary Leff is wrong.
Rewards cards cost the small business more. The fees charged to small business are higher with rewards cards, so much higher that it is the business who is paying for the rewards, not the credit card company. The credit card companies forces the business to take all cards and cannot exclude reward cards. It is fortunate that there is not a 50% cash back credit card because the small business would probably have to pay a 53% commission for that sale.
As far as cash costing more to handle, that is not always true.
The question I how much have the retailers and their assorted “associations” paid Mr. Durban to put forth such caring legislation?
@derek – most cards are rewards cards, there are non-rewards cards with lower cost, but those using rewards cards vs non-rewards spend less – in any case rewards cards are cheaper than cash, and cards provide a real service to merchants. why should the government require that service to be provided even cheaper?
@ Gary Leff
“your suggestion that interchange caps have been deflationary”
I didn’t say that.
“and what you don’t mention is that the rules capping these fees were in response to merchants gouging consumers for card acceptance when those fees became permissible – a new rule to limit the damage caused by the first rule.”
I clearly state that those rules (applicable from 2016) stymied price gouging by the merchants.
You can read a summary of the earlier history here:
https://www.rba.gov.au/payments-and-infrastructure/review-of-card-payments-regulation/banks-card-system.html#:~:text=In%20April%202006%2C%20the%20Bank,took%20effect%20in%20July%202006.
Interpret that as you will. Clearly, trying to extract an incredibly simplistic position (as is your preference) is fraught given the complexity of the attendant issues.
Sounds like there is nothing more important in the world than to tackle this nonsense
tell Dorbwit to go find something helpful to do with his time
Well he would say that wouldn’t he. Gary’s wages are paid by the credit card companies after all.
Now that now merchants can charge more for credit card transactions, we can just let the market figure it out.
@Gary Leff in response to his response
@derek – most cards are rewards cards, there are non-rewards cards with lower cost, but those using rewards cards vs non-rewards spend less – in any case rewards cards are cheaper than cash, and cards provide a real service to merchants. why should the government require that service to be provided even cheaper?
—
I have a close family member that has a small business. “Most cards are rewards cards” is not true. It may be true for readership of airline blogs but a lot of customers of that small business use debit cards and non-rewards cards. The reward cards are not cheaper than cash to handle. The reward cards are certainly more expensive to handle than debit or non-rewards cards. The reward cards are extortion to the small business, who are required to take them along with the other credit cards.
@AC, not only are they psychologically more likely to spend more if usung a credit card, they have more available to spend. I expect a lot of people are like me in carrying very minimal amounts of cash. If I am going to have to pay extra to use a credit card, I will just pass up the purchase in most cases.
Hate those insurance rats
I refuse to return to any business that charges me a fee to use a credit card. If more people followed suit then the vendor would cease this insidious behavior.
I suspect the politicians are sending a shot across the bow to drum up contributions from interested parties to kill the legislation.
Doesn’t AA make more money on points – than actually flying? So if points go by the wayside, what happens to the airlines profits + revenue?
platy says: @ Gary Your claims about Australia do not accord with the lived experience.
Platy your claims do not agree with he 2% fee the hotels in Sydney charged me for 5 days there.
Their website says:
Non Adv Pur Rates Incur 3 Pct Msf For Jcb, Diners & 1.5 Msf For Amex & Other Cc
Guess your WRONG
@ TOMRIR
“your claims do not agree with he 2% fee the hotels in Sydney charged me for 5 days there…Guess your WRONG”
Or you are simply ignorant about the legislation. Let’s find out.
The legislation limiting card fees applies to cards issued by Australian banks.
If you are using an Australian bank issued card and the fees charged are above expectation, you have legal recourse.
As stated in my original post “Different merchants try their luck in the way they interpret the rules”.
Incidentally, when I try a booking at the Sydney Marriott per my Australian based Bonvoy account, I get the following alert on card fees:
“Payments by credit card incur a 1.5 percent merchant service fee added to the amount payable”
It may be the case that you were charged more because you were using a card not issued by an Australian bank and / or that Marriott is differentially charging non Australian members a higher card fee.
In any case, the example absolutely proves my position – the limits on card fees to consumers have / do reduce the amount paid. I would pay 1.5% (covered by the legislation) and you would pay 2% (if not covered by the legislation).
Thanks for cueing the perfect example of why you are wrong.
Although Australian legislation nominally limits the credit card fees to the cost to the retailer (ignoring the fact that cash payments incur handling costs, albeit not explicitly), it’s an honour system and I am unaware of any audits/checks being done to verify that retailers are charging the correct rate. Furthermore, many retailers just put up a sign saying “surcharges may apply” with no detail of what the surcharge will be, and many retailers don’t even put up that notice. You only find out when you tap your card to pay and suddenly the amount being charged is different to what the screen displayed before – too late for you to change your mind. And occasionally you will find that vendors impose a card surcharge but won’t accept cash, so there’s no way to buy the goods at the advertised price.
Mostly the larger stores are better about this, and it’s small businesses that try to nickel-and-dime their customers with surcharges (extra 50 c if you want ketchup on your fries, Sunday surcharge, credit card surcharge etc.).