Laying the blame for climbing gas prices

Posted by Ryan Radia

Gas prices have climbed to record highs for many reasons, including expensive oil, cheap dollars, and strained refineries. But some have offered an especially novel explanation for consumers’ pain at the pump: credit card interchange fees.dd

A retailer-backed lobbying organization ran a full-page ad in the Washington Times yesterday in support of a bill being considered in the House of Representative to cap interchange fees. (We’ve discussed the potentially disastrous implications of the legislation in several blog posts and a media statement.)

The ad plots the growth of interchange fees next to the increase in gasoline prices, claiming that steadily rising credit card fees are eating into gas station owners’ profits, translating into higher prices at the pump.  

Speaking of the pump—when I fill up my gas tank, I usually pay at the pump with a card. This saves my time and eases the station attendant’s workload. And in the middle of the night, when most stations are closed, you can still often buy gas by paying at the pump.  

A decade ago, paying at the pump was rarely offered, and many stations didn’t even take plastic at all. Over time, credit cards acceptance has grown as gas stations have come to realize that accepting cards is worth it, despite interchange fees.  

Blaming interchange fees for high gas prices is like blaming the “bridge to nowhere” for the mounting federal deficit. Credit card fees represent just a tiny portion of the cost of gasoline, and even if they were eliminated, gas would be at most just a few pennies cheaper. 

If gas stations can’t offer competitive prices because of interchange fees, they can always go cash-only. As bargain-seeking consumers grow more willing to shop around town for the best deals on gasoline, savvy station owners are free to stop paying interchange fees. Gas stations could even undercut competitors’ prices by accepting cash exclusively. 

Still, handling cash and coins isn’t free. It necessitates cash registers, armored car services, security measures, and also increases the risks of theft and fraud. As consumers have flocked to credit cards, gas stations now process less cash, reducing the implicit transaction costs of handling cash. But unlike interchange fees, there isn’t a line on gas stations’ general ledger for “cash handling costs.”  

There is little reason to believe that cutting interchange fees will actually translate into cheaper gas prices. Australia’s experience with interchange fee price controls strongly suggests that merchants will pocket the savings from lower fees instead of cutting prices for consumers. 

Even if lower fees actually result in cheaper gas, consumers would still end up paying in other ways. To make up for lost revenue, card issuers would likely increase annual cardholder fees and cut back on rewards benefits. What’s the point of price controls if they merely shift consumers’ dollars from one pocket to another?

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05/16/2008 @ 11:04 am | Economic Liberty, Energy | Comments

Congress ponders Price Controls for credit card companies

Posted by Ryan Radia

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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04/14/2008 @ 12:51 pm | Economic Liberty | Comments

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