I don’t visit ATMs much anymore. Instead, I mostly rely on credit cards. Credit cards are now accepted by all kinds of stores, from small, family-owned restaurants to national department stores. And since many credit card transactions no longer require a signature, paying with plastic is quick and easy, eliminating the need for cash withdrawals and coin-filled pockets.
Yet this recent explosion of credit card use may soon come to a halt thanks to a new law under consideration in Congress. CNN reported last Friday that merchants are lobbying hard for new legislation to regulate interchange fees (the charges credit card companies assess retailers whenever a card is swiped). These fees have drawn the ire of retailers, who pay around 2% of each transaction to the credit card issuer.
Despite being widely demonized, interchange fees have an upside. Many card-holders benefit from rewards programs made possible by interchange fees. For example, on my Bank of Americard, I get the equivalent of 1% cash back of all purchases I make. And since my card has no annual fees, I actually save money paying by card instead of cash. Not to mention the simplicity of paying my credit card bill with just a few clicks online, electronically transferring funds from my checking account without the hassle of paper statement.
Nobody is forcing retailers to take credit cards. If a business doesn’t want to pay interchange fees, it is free to go cash-only, or accept checks instead. Still, most shops gladly take plastic, because they’ve realized that customers spend more when they can pay with a credit card.
Retailers say regulation is needed because card issuers supposedly collude to keep prices high. But there is competition among credit issuers, as the Wall Street Journal recently observed, and it has intensified in the past few years. Visa and MasterCard may be the most ubiquitous, although many retailers also accept American Express and Discover, and online credit card alternatives are coming on strong. Claims of oligopoly are tenuous, and there’s no justification for imposing price controls on the credit card market.
Credit card usage has spiked since 2000, and is slated to keep growing quickly. But if Congress punishes credit card companies for being too successful, the market for new payment methods will stagnate, and consumers will be stuck using dumb currency in a smart economy.
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Having had run ins with credit card companies, and their practices, the only “dumb” currency, IS credit. The whole society is in debt up to it’s eyebrows. We could use more use of “dumb currency”.Credit cards are just usary, with pretty advertising. You won’t hear any complaints from me, if they are regulated some more.
brierrabbit, I don’t see credit cards as dumb. Some people who use cards irresponsibly rack up credit card debt, but that’s not the bank or the card issuers fault.
Credit cards may have high rates, but they’re an easy way to borrow a few thousand for a limited time without applying for a loan. Lots of upstart entrepreneurs and even independent movie producers have relied on credit cards for financing.
Keep in mind you don’t have to pay interest on credit cards. Spend what you can afford, and just pay off the entire balance every month (as many people do) so you won’t accumulate debt.
Ryan, I work for a merchant group that’s involved in this (Merchants Payments Coalition) and I believe you have this wrong. Calling it regulation is too broad, but it most certainly is not price controls. The only price control going on right now is by Visa and Mastercard. The market is not determining the interchange fee price.
If the market was working, wouldn’t the fee be driven lower by competition? Instead, the fee inexorably rises. This, despite the fact that technology costs keep plummeting, so the transactions cost less. The interchange fee is a holdover from the days when merchants had to (ka-chunk!) take impressions and sort it out later. Now it takes moments.
Plus, interchange fees may benefit the holders of reward cards (although I dispute that rewards are all that great, since you have to spend money to make money) but they don’t benefit consumers that don’t have the cards. Because it’s impracticable to offer cash discounts, merchants have to build the interchange price into the cost of all goods. So, some consumers get a return on the fee, but everybody pays more.
Lastly, the Conyers-Cannon bill does not set the prices, it merely gives merchants a seat at the negotiating table. Right now, Visa and MasterCard won’t even talk. Don’t you wonder why there is so little transparency between them? I think it’s because they know they’re getting away with something, and that the current system is unsustainable.
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One thing we need to know about credit cards is that we need to keep ourselves informed about our options. You area fortunate case, you know exactly what advantages provides you your credit card, unfortunately not all Americans are interested in this kind of “details” and they end complaining about credit card companies…
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