According to the piece, we generally don’t see surcharges on American Express and Discover cards because their rules allow surcharges but only on equal terms with other cards accepted by a merchant. So a store accepting only American Express could impose surcharges now. But if that store also accepts Visa and Mastercard, they cannot add surcharges to purchases made with those cards, and thus cannot also add surcharges to Amex charges. Thus ending the contractual prohibition on Visa and Mastercard surcharges would effectively and the practice of also not adding surcharges to American Express and Discover payments.
The Durbin Amendment to the Dodd Frank financial reform law signed in 2010 limits the cost to merchants of accepting credit cards, but doesn’t affect the cost of accepting credit cards. Debit cards have been much less profitable for banks since then, and one effect has been for banks to see their checking account customers as less profitable and to increasingly impose fees on consumer bank accounts. Another has been a reduction in rewards for consumers using debit cards (it no longer makes sense for banks to buy miles to reward debit card customers when the cost of the miles is greater than the fees the banks are earning for a transaction). Suntrust is one recent exception, where they re-instated points-earning debit cards. But Suntrust was one of just a handful of banks that failed stress tests several months ago, and rewarding consumers for opening accounts is one (albeit high cost) way to bring in new deposits and shore up their capital position.
Since retail stores haven’t been able to get the government to force credit card companies to charge them less for their services through legislation, the courts (and the threat of massive punitive damages) represent a new way to rewrite contracts to reduce costs on retailers that accept credit cards.
Now, for all of the complaints about interchange fees (and of course retailers want to pay less for the services they receive), it’s worth noting that companies get money right away, deposited straight into their account when processing credit cards, and without the risk that a check bounces. Consumers paying by credit card tend to spend more money per transaction. Credit card transactions also reduce the likelihood of employee theft significantly compared to cash transactions. And they allow consumers to better manage cashflow (one bill at a specified time each month rather than money coming out of an account right away). It’s easier to track balances in checking accounts in real-time when paying a single bill (most people don’t fill out their check register after each debit card transaction), and this helps consumers avoid overdraft fees. So both consumers and merchants benefit from credit cards, entirely apart from rewards programs.
In the Journal piece, retailer lobbyist Mark Horwedel argues that if merchants could impose surcharges, credit card processing companies would simply lower their fees so that merchants wouldn’t impose the surcharges. In other words, he’s hoping to use the government to improve merchant bargaining power against Visa and Mastercard.
It’s worth looking abroad at countries that have allowed credit card surcharges and that have pushed down interchange fees to understand the likely effects. According to this 2010 paper (.pdf),
These unintended consequences include increased costs and fewer benefits for cardholders. This is precisely what happened in Australia—the most complete experiment to date with regulating interchange fees—when the central bank in that country artificially capped interchange fees. Credit card customers in Australia now pay more for their cards and receive less in return, and there is no evidence that consumers, including those using cash or other forms of payment, have benefited at all or that overall economic efficiency has improved. In addition, artificial reductions in interchange fees would likely cause card issuers to reduce their risk of credit loss through lower credit limits or tougher credit standards, essentially reducing the availability of credit. This has consequences for consumers, as well as merchants, the latter of which should expect decreased revenues if the supply of consumer credit is further reduced.
The paper goes on to suggest that lower credit card volume would be bad for credit unions that disproportionately rely on interchange fee revenue (despite massive government handouts, financial institutions remain weak),
Frequent flyers who expect consumers to benefit from lower interchange costs need only look at Qantas, which imposed a fee on consumers for paying by credit card without lowering price.
Nonetheless, the Journal predicts that the retail lobby could accomplish through a legal settlement what it couldn’t get included in Dodd Frank legislation.