The Senate passed its version of the National Defense Authorization Act without the Credit Card Competition Act from Senators Dick Durbin (D-IL) and Roger Marshall (R-KS) included, pushing off risk of new rules driving down interchange rates in the near-term. To placate the Senators, Senate leadership promised a future vote on their long-running quest to deliver a gift to retailers at the expense of card issuers.
I’m confident this was bad legislation. I’ve seen poor argumentation on both sides, and I’ve seen good arguments against it, but I haven’t seen strong arguments for it. And I’ve looked. I’ve asked around, wanting to construct a steelman case for it, and I’ve come up empty.
Ultimately businesses pay for a service – credit cards facilitate payments for their products, and even generate higher revenue (people paying by card spend more) – but those businesses would like to pay less for that service. So they’ve turned to the government to force merchant networks to provide this service at lower prices.
- This is not about consumers. Where interchange has been limited, that hasn’t led to lower prices (for anyone).
- And it isn’t good for the economy. Making it less profitable to extend credit is bad for households, businesses, and growth.
- It isn’t even about fairness. It’s generally cheaper to accept credit cards than cash, because employees miscount change, they pocket cash, and cash needs to be deposited in the bank (indeed, businesses that hold large amounts of cash may face higher insurance costs too).
Instead this is about the government taking money from a disfavored group (card issuers, payment networks) and giving it to a favored group (big retailers).
My take has been that,
- This would not pass. It’s controversial, in an election year, and not a priority for the administration. The President was Senator from Delaware where the banks are based.
- The entire reason that Senators Durbin and Marshall were trying to attach it to the unrelated ‘must pass’ National Defense Authorization Act was that they couldn’t pass it on its own.
- They failed to get it attached to that act, just as they failed previously, so a commitment for a future vote is largely symbolic.
- But it wasn’t even intended to ever pass! That would have undermined the purpose of introducing the legislation in the first place.
- This is the perfect issue for opening up contribution wallets in a presidential election cycle from both big retailers and banks. It’s a vehicle for generating political cash.
- That doesn’t mean it couldn’t happen – while the chances were and are very low, these things can take on a life of their own. I’ve been 95% confident it wouldn’t happen but that leaves 5% long tail risk.
Now the commitment to a future vote underscores the political drive to ‘keep the issue alive’ for continued fundraising.
Interchange may not be high forever. It could be competed down by new technologies. For now blockchain processing is far more expensive than processing through card payment networks, but that could change. FedNow could mean more low cost electronic payments. And I’m not sure markets have adjusted to that possibility in valuing frequent flyer programs. Those valuations are largely driven by banks buying miles to incentivize transactions which become uneconomic at lower transaction pricing.
I think it’s been a mistake to focus argument against this bill on how lower interchange would harm rewards. It implicitly concedes the argument that interchange redistributes money from poorer consumers without rewards to those that receive rewards, when that’s not accurate at all (it redistributes from those who pay credit card interest to those who pay off their bill in full each month, though those who do not receive a service that those who do do not receive). For now, though, as-expected the risk of this bill becoming law has been substantially downgraded.
Were such a provision to be voted into law, my suspicion is that the banks would run up the interest rates and fees charged to consumers on credit/charge cards. That would likely mean those consumers in far more precarious financial positions than the wealthiest are to more likely end up in an even more financially more precarious position than before — at least if everything else about consumer behavior remains the same.
You know the sayings: the road to hell is paved with the best of intentions; and no good deed goes unpunished.
Gary,
I am living in D.C. Now, a lot of restaurants include fine dining such as Michelin restaurants start charging processing fee if you pay by credit card. Fee is between 3-5 percents. So, what do you think the effect to rewards credit cards in future. Since the return below 3 percents is useless and some restaurants that charge 5 percents, no card that give me this return for spending. I used basic value 1 point = 1 cent since nowadays, it is difficult to redeem for air tickets or hotels stay.
James,
To your point, that is ridiculous to pass on the cost of doing business to the customer of a high-end dining experience. It’s petty, especially given that credit cards are a market norm and nothing has changed with respect to the related merchant fees.
The businesses benefit from payment automation into their bank account along with the efficiencies of processing. Bank lockboxes to process cash are not cheap either, but I’m not hearing of businesses passing on those fees to customers paying cash. For cash, they either need to pay an employee to physically bring the cash to a branch or they’re paying for Brinks to pick up via armored truck.
I would seriously start paying with rolls of coins to get my point across. It’s offensive if being surcharged for a presumably $300+/pp meal that has a ton of margin built in already.
I just bot peaches in Fredericksburg, TX at a local orchard where the credit card surcharge was 4%. Merchants can police the issue themselves, by offering a cash discount.
AT&T just announced its intention to go to war on interchange rates by changing the automatic payment discount from $10 off/month off your bill if you go paperless and pay by credit card to $5 off/month. But those who pay by debit card will continue to receive the $10/month off discount.
The only thing I know is that right before the merger of US Airways with American, I actually flew BOS-FRA;CDG-BKK-SYD-BKK-LHR;FRA-BOS in First Class, for 90k US Airways Dividend Miles and like $100 in taxes and fees.
That redemption was absolutely epic on A380s and 747s in First Class to Sydney and back the long way around.
We will never see that again. Ever.
I refuse to patronize vendors who collect a fee for using a credit card. I agree that credit card fees are probably too high and wish there was more competition in this arena that would drive down interchange costs. Perhaps one day that will be the case. In the meantime, I take my business elsewhere whenever a fee is assessed to use a credit card.
@ GUWonder
There are no best intentions or good deeds. This is Congress. It’s about fundraising.
Many credit cards are competing now. What they need to do is extend the cash rewards and make it more. This way, they’ll attract more business.
Of note T-Mobile is changing their accepted autopay method. Up until now customers received a $35 discount for paying automatically by credit card. As from August 10th unless that is changed to a debit card or bank account withdrawal, they will no longer receive that discount.
I am looking at alternative carriers…
I reduce the tip to my server by 4 % and tell them the owner owes them the 4%
Just lol if you think voting D or R solves anything.
Yes indeed. Many restaurants in South Florida ranging from breakfast cafes to high-end establishments are charging an additional 3% (average) to bills now if you use a credit card. One has even begun charging an automatic 18% gratuity then adds taxes & fees. We’ve been fighting back with using cash. Not always in convenient large bills, I make it fun with using $1s, $2s $5’s and dollar denominated coins. Everybody wins!
Annual income tax, CPA refused to honor credit card fees at all. D & R did not figure at for consumers who have been charged for the fees
One can argue that the price of handling cash isn’t as low as one believes, between higher embezzlement rates, chance of robbery, and time or cost to deposit the money and get change. However, some processing companies are pushing things even further by not refunding transaction fees when a purchase is refunded, and to charge a fee for a chargeback which was successfully overturned. Louis Rossman just had a video on this issue.