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Are we sleepwalking toward worse credit cards?

by Peter Andrew

There have been many stories in the media over the last several years -- some of them on this website -- about interchange fees. You may have skipped over them because they sound like something that would interest only credit card nerds. But the battle between retailers and credit card companies over those fees could have a very real impact on the plastic in your wallet. And you may not like what happens next.

Credit cards and interchange fees

Interchange fees, also known as swipe fees, are the cut (anywhere from 1 to 5 percent) of the transaction value that payment networks keep every time a credit card is used. Those payment networks (American Express, Discover, MasterCard and Visa) keep some of the money themselves to cover costs, but a big chunk is passed on to the credit card company that issued the plastic.

Two percent may not sound like much, but it adds up. The National Retail Federation (NRF) claims that swipe fees have trebled over the last 10 years, and now cost merchants about $30 billion a year. If you assume that merchants pass that on to consumers in higher prices, that would add an average of $250 per year to the living costs of every household in the United States.

Credit card companies in need?

The billions in swipe fees received by card issuers make up an important part of their revenues. Since the credit crunch, fewer Americans are carrying forward card balances so income from interest has been squeezed. And the Credit CARD Act of 2010 limited by law the amount they can charge in penalties for late payments and so on.

We're a ways off organizing fun runs in aid of credit card companies, but the picture seen by their CFOs today must be very different from the one that existed five years ago. What would happen if it changed again, and their incomes from swipe fees were to be slashed?

Rewards credit cards (and more) at risk

We can get some idea of how things might turn out if we look at countries that already regulate interchange fees. In an article for CardRatings.com, it soon became clear that rewards credit cards in the U.K. were less generous than here, and an interview with British expert Mark Jackson of Auriemma Consulting Group, revealed why: "In the U.S., interchange on credit cards is considerably higher than it is in the U.K., which means that issuers can invest more in rewards programs, making them deeper, more tangible -- and easier for consumers to see their value."

But it may not be just the generosity of rewards credit cards' programs that could be put at risk. If issuers are squeezed hard enough, annual fees could become more common and higher. And credit card rates could increase too.

A price worth paying?

Some might welcome such changes. They might argue: Running a card operation is an expensive business, and the costs associated with doing so should be paid by those who benefit. Why should that $30 billion a year in swipe fees be passed on in higher prices to all families -- including the poor and the unbanked? It's like a purchase tax on the whole population, the proceeds of which are spent on subsidizing the relatively rich.

A matter for the courts

The reason you may have seen headlines about interchange fees recently has nothing to do with any proposals for federal regulation of them. The chances of any such bill being passed by the current Congress seem close to zero. What's happening at the moment is a court battle that looks as if it could turn into the modern equivalent of the Hundred Years War -- or of Jarndyce v. Jarndyce, if you're a fan of "Bleak House."

In brief, about eight years ago, a whole lot of retailers sued MasterCard and Visa, alleging price fixing. A $7.25 billion settlement was provisionally reached last year, but many merchants are rejecting that because, they say, it covers only past practice, and won't affect the future. Now, as Bloomberg reported on May 25, MasterCard and Visa are suing those nay-sayers and requesting the court to declare legal the way they levy their fees.

Practice versus principle

Whichever side in the case you find more attractive, there's a practical aspect to the argument that some may find more compelling than the theory: What's going to happen to the $30 billion a year? If merchants win, will they really pass on their savings in lower prices? Or will they pocket the extra money themselves?

October 2011 saw swipe fees on debit cards capped, much as merchants are now arguing should happen with credit cards. Did you notice a drop in prices then?

There's nothing wrong per se in the CEOs of big retailers splashing out on second yachts, or bodega owners trading up to nicer cars. But if the real choice here is between more affluent merchants on the one hand, and affordable, rewards-rich credit cards on the other, many might choose the latter.

Published 06/10/13 (Modified 11/19/13)

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