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Wednesday, 21 April 2010

Credit Cards, and Fairness

Since my financial and arithmetical acumen is such that I have trouble with questions such as whether it is better to have a dime or a dollar, I shall have to take this on faith, but it seems right to me:
[Credit and debit cards are] 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. ..

Card companies generate ... 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.

... 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.

... 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....

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.

It seems to me that would do almost as much to make small business more viable as health insurance reform.

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