Our $48 Billion Credit Card Bill

Our $48 Billion Credit Card Bill
By ALBERT A. FOER
Copyright by The New York Times
Published: April 20, 2010
http://www.nytimes.com/2010/04/21/opinion/21foer.html?th&emc=th


Washington

THESE days, it’s hard to find anyone who doesn’t use credit and debit cards regularly — they’re convenient and compact and often come with small cash-back incentives.

But what almost no one realizes is that those benefits are far outweighed by an implicit transaction fee, set by credit card companies and their issuing banks, that costs consumers more than $48 billion a year. As Congress works toward passing consumer financial reform legislation, it should include new rules about how — and how much — credit card companies can charge.

The credit and debit card system is dominated by two companies, Visa and MasterCard, respectively accounting for 47 percent and 35 percent of the general purpose credit card market in 2008. While those firms handle the transactions, they depend on banks to issue the cards to consumers. The result is that Visa and MasterCard compete to deliver the highest returns to the banks rather than offer the lowest prices to consumers.

Card companies generate those returns by charging an “interchange fee” for every credit or debit transaction they run — when a merchant accepts your card for a $100 item, it gets approximately $98 in payment. These costs are passed on to all consumers — even those who pay by cash — in the form of higher retail prices.

None of this is new or controversial information; you can find it in a recent Government Accountability Office report to Congress. What is less well known, however, is that many countries have instituted consumer protections against such hidden taxes, while the United States, which has some of the developed world’s highest interchange fees, has left them completely unregulated.

True, there’s an antitrust class action suit by merchants pending, but its resolution is a long way off and it’s unclear if or how it would benefit consumers. And while several legislative proposals are sitting patiently in Congress, they would at best only chip around the edges of the problem.

Instead, Washington should take two straightforward steps.

First, Congress should recognize the obvious: debit cards, whose use and fees are growing at a rapid rate, are actually no more than plastic checks. Congress and the Federal Reserve do not allow banks to charge their customers a percentage of each check, and it should put the same restriction on debit cards.

Second, Congress should authorize the Federal Reserve to limit credit card interchange fees to their actual cost, fairly determined, plus a reasonable profit. The annual savings to merchants would be in the tens of billions of dollars. Since retailing is highly competitive, most of these savings would be passed on to consumers in lower prices or in the form of improved services by retailers that could afford to hire more people.

How can we be sure this would work? Because other countries have already done it. In Australia, for example, regulation brought the credit card interchange rate down from .95 percent to .50 percent — compared to our approximately 2.0 percent. Five years of experience has confirmed that the payments system works fine; in 2008, the Reserve Bank of Australia estimated the savings during the previous year to have been around 1.1 billion Australian dollars (approximately $1 billion).

If the United States were to reduce the interchange rate from 2.0 percent to 0.5 percent, the savings would be $36 billion per year, less some relatively small offsets.

Not only would such savings make our retail payment system more fair, but it would represent a significant economic stimulus at a time when consumers are just starting to spend again. And best of all, it wouldn’t cost Washington a thing.

Albert A. Foer is the president of the American Antitrust Institute.