The Dick Durbin-Roger Marshall legislation trying to limit credit card interchange, to reduce costs for big businesses, would mean less credit and more costly credit for consumers.
For banks covered by the law, they’d no longer make as much on credit cards. So they’d no longer spend as much marketing cards to consumers, investing putting cards in the hands of consumers. That makes credit less available. As the New York Federal Reserve explains,
Credit availability is a crucial ingredient in any advanced economy’s recipe for economic growth because credit can support investment in productive enterprises and can smooth household spending from fluctuations in income
Where interchange has been limited, like in places such as Australia, credit card annual fees have risen since spend on the cards isn’t as profitable.
Europe, where interchange is limited and the use of cards as a payment mechanism is less common than in the United States (and cash more prevalent), is much poorer than the United States. That’s hardly the only reason, or the most significant reason. It’s a bundle of policies, and the U.S. would be ill-advised to follow European economic, financial and regulatory policy.
Per capita GDP in 2020 U.S. dollars:
- Greece: $17,676.19
- Spain: $27,057.16
- France: $38,625.07
- U.K.: $40,284.64
- Germany: $45,723.64
- U.S.: $63,543.58
Ben Bernanke literally just won the Nobel Prize in economics, with the committee citing his “Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression” which showed the role of limiting the supply of credit in reducing economic output, driving the Great Depression. Big banks aren’t likely to fail from capped interchange, but lending matters to the economy.
This specific legislation to cap credit card interchange wouldn’t actually kill credit card rewards entirely as some have suggested, but it would be bad for consumers. Remember that where interchange has been capped prices to consumers haven’t fallen. This is lobbied for by big retailers not because it’s to your benefit.
There are several levers banks have to make money on credit cards: Merchant fees, Interest payments, Late fees, Annual fees, Velocity of collecting from cardholders, and paying merchants, and converting charges to loans and balance transfers.
If merchant fees go down, the other income sources have to go up, or expenses need to go down. Rewards serve two purposes, to make one card more attractive than others, and to attract new customers, but they are a big source of bank expenses. I expect rewards become less valuable. Banks might start charging fees for months where no balance was carried over. Whether fee income is a better thing for a consumer or a bad thing, it is if the consumer gets no tangible benefit. If more places would accept cards when they have lower fees is unclear.
In fact Canada just approved adding these fees my merchants.
Gary,. you wrote Roger Wicker. He’s no longer in the Senate. Believe you meant Roger Marshall.
That unlimited credit-card-skim allowed in the US is part of the reason for the high “average” income – but all that means is a handful of Wall St billionaires are skewing the average. Everyone else is struggling. Check out how many homeless people you see in the US versus the other countries listed.
On your same list yesterday, I replied with the GDPs of some other European countries. Switzerland, for example, doesn’t do personal credit much (you can only get a mortgage for max 4x down payment), and yet had a per capita GDP far higher than the US.
Availability of credit as cited has nothing to do with US credit card practices. To be clear, in general US CCs charge more in merchant fees, give usurious rates to clients, and offer better bonuses.
From the frequent flyer perspective, we don’t yet have status determined by credit card or spend, while we get the priority pass crowd, our lounges aren’t yet overrun by cardholders, and, strangely, everything is quieter and more relaxed.
Maybe that’s what the US needs. Of course, it’d be harder for US bloggers who take a cut from the CC pie.
Gary,
All good points and I agree. Also agree cards benefit many retail merchants since people typically buy more on them, cash/checks can be more costly due to handling/fraud and merchants are unlikely actually lower their prices as a result of this legislation.
However none of that matters. With this Administration and Congress the bill will almost certainly become law, especially riding on a defense bill.
You have your head in the sand. Accept reality and adapt. This will be the end of many credit card benefits (unless much higher AFs to cover them) and also the end of many blogs. That is reality whether any of us like it or not.
@AC – I’d be open to a bet on whether this gets passed in 2022.
@Gary – I sure hope you are right. Maybe I’m just resigned to politics dominating. Trust me I hope it doesn’t go through but given Biden, Warren, Bernie, etc with some level of bi-partison support (only takes 1 GOP in Senate) and the fact it is attached (at least for now) to a bill that will almost certainly get passed I’m not optimistic.
I would gladly pay off a bet since I don’t want to be right about this.
It’s not just gdp per capita but median household income. Ignorant and naive people rave about government funded tuition, more welfare, and government funded medical care for all in Europe but median household income in countries like Germany and France are €30,000 vs. $62,000 in 2021 in the U.S. There is limited economic mobility and people are generally stuck in the socioeconomic situation they are born into. If they don’t work, they have welfare and rent control keeps rents in certain cities and countries for an apartment bearable but it’s very limiting.
High taxes, burdensome regulations, and etc are a major cause but lack of credit also factors into less economic growth and wealth. People in the U.S. are awash in unsecured credit which if used wisely can provide the safeguards when just starting out in a career. Europeans really don’t have credit cards the same way Americans do and they are definitely not better for it. The U.S. has a lot of problems due to demographics and things that are a pain to talk about but the size of the country allows location arbitrage that makes credit go further in lcol areas.
I have told you at least half a duzend times, that the European system is not comparable with the American one. You are deliberately spreading falsehoods!
In Europe those fees were never included, always an additional charge, hence the people avoided using credit cards like the plague. Regulating those fees was a huge blessing! Many people still believe that cards are crazy expensive to use hence they are used less frequently, but that is changing slowly.
If you want to see why the US has a huge advantage over other areas of the world watch on YouTube:
RealLifeLore – How Geography Made The US Ridiculously OP
Those are the IMF estimates for GDP per capita (US$ PPP) by country:
Luxembourg 140,694 2022
Ireland 124,596 2022
Switzerland 84,658 2022
Norway 77,808 2022
United States 76,027 2022
Germany 63,271 2022
How about a disclaimer that these fees help pay for your lifestyle, hence why breaking up the duopoly is so upsetting to you
‘Everyone else is struggling. Check out how many homeless people you see in the US’
The BS one has to read… Maybe he meant homeless by choice? (drug addicts with total disregard for their own lives).
Everyone else is struggling? oh sure, so almost 40 of my former employees in Venezuela, 90% who crossed illegally the southern border, the last couple of them even took the long route thru the Darien, and all of them begun working almost immediately after entering the US and are living a totally decent life compared to Venezuela (the same with all their friends and relatives who also crossed), are an outlier I guess, a huge chunky outlier.
Struggling is receiving $5 a month as ‘social security’ benefit in Venezuela.. Oh, the lovely socialism!
It will certainly hurt Gary’s personal economy but maybe an opportunity for him to use his obviously bright mind on something that benefits the world to a greater degree than airline points.
@harry hv if you think credit card fees are the reason for homelessness then you are part of the problem.
Do not forget business BENEFIT from credit cards.
Cash is not stolen by customers
Cash is not stolen by employees
Employees are NOT murdered when they take deposits to banks.
Business do NOT get bounced checks from customers
Business do NOT get counterfeit currency
Business get paid BEFORE they perform the services or deliver the goods
(credit cards are charged at the gas pump before you fill up)
Businesses in one country can get payment from customers in another country.
Businesses in the USA can take US $ payment from a credit card in another currency
Does anyone remember 1960s?
When my parents had to take enough cash with them to pay for food, fuel, hotels, etc on our trip to Florida…. my mother tracking every cent in a book as we went along.
If business do not want to pay the Fee then STOP taking those credit cards that charge the fee. A restaurant near me does not take Amex, they lose customers because of that.
Thus a hotel and stop taking credit cards that charge fees and only take cash….. see how long they are in business.