Rep. Jason Chaffetz (R-UT) sent a Dear Colleague letter in January urging Congress to “consider the potential negative impact on consumers” of any new credit card legislation and to reject “legislation that would shift the costs of card acceptance from retailers to consumers.”
Chaffetz was referring to legislation that would regulate interchange fees, also known as “swipe fees,” which merchants pay to card issuers for each credit card transaction.
These fees are generally 1-3 percent of the transaction value. The exact percentage varies depending on a number of factors, including the type of credit card used and the size of the merchant accepting the card.
The fees generate between $40 billion and $50 billion in annual income for issuers.
Rising Fees, Falling Profits
Merchants have increasingly complained about interchange fees. In a November 2009 report, the Government Accountability Office (GAO) stated the fees are rising, cutting into profits on each sale and, as more consumers use credit cards, into overall profits.
An interchange fee amendment introduced by Representatives Peter Welch (D-VT) and Bill Shuster (R-PA) did not make it into the final Credit Cardholders’ Bill of Rights of 2009. But to the dismay of credit unions, banks, and the credit card industry, Congress is considering two pieces of interchange legislation, one in the House Judiciary Committee and the other in the Senate Judiciary Committee.
Committee spokespersons say it is too soon to say whether the committees will take action on these bills.
John Berlau, director of the Competitive Enterprise Institute’s Center for Investors and Entrepreneurs, argued in Wall Street Journal opinion pieces against the proposed interchange laws. Berlau wrote retailers are being opportunistic, painting themselves as victims of the banks.
“The banks are being vilified—somewhat for legitimate reasons,” Berlau told Budget & Tax News. “Retailers see an opportunity to get something for themselves.”
Questions About Effects
Meanwhile, questions remain about the effect these laws would have on consumers and lending institutions.
In its report on interchange fees, the GAO found when countries, such as Australia, have regulated interchange fees in order to reduce merchants’ costs, banks have raised annual fees and reduced rewards programs. The GAO also found there is no evidence consumers would benefit from the proposed laws in the United States.
“If interchange fees for merchants were lowered, consumers could benefit from lower prices for goods and services, but proving such an effect is difficult, and consumers may face higher costs for using their cards,” the report stated.
Important Revenue Source
Regulation of interchange fees might stop some institutions from being able to issue cards at all, says Dan Mica, president and CEO of the Credit Union National Association.
“Interchange is a significant source of revenue for smaller issuers such as credit unions,” said Mica. “In many cases this revenue allows credit unions to offer credit card programs which are competitive with card programs offered by much larger institutions. Limiting or reducing interchange would limit competition, and our members would pay the price.”
With all this uncertainty, Chaffetz urged his colleagues not to take sides in “a fight between two industry groups.”
“The government has enough to worry about,” Chaffetz said. “This is not what we should be doing.”
Berlau agrees. “The funny thing is,” he said, “having an ATM on every street corner has made it easier for a business to just take cash.”
Arin Greenwood ([email protected]) is a writer and lawyer in Alexandria, Virginia.