Credit Card Regulations and Unintended Consequences
by Mr Credit CardThere was an article in the New York Times a couple of days a ago talking about credit card regulations in Australia and its’ unintended consequences. I’d thought I’d summarize some of the key points raised in the post.
The heart of the article focuses on merchant fees that credit card issuers charge merchants for processing credit card transactions. For every $1 that a consumer spends using a credit card, the merchant only gets 98 cents. On average 2 cents goes to credit card processors like Visa and MasterCard and the banks that issue them. The was a law in Australia that was passed a few years ago that essentially put a cap on the fees that processors could charge merchants and effectively, the fees were halved!
Well, that was all good for the merchants as they could technically lower the cost, there were some unintended consequences about this law. Firstly, credit card processors and banks that issue credit cards saw their profits from processing fees cut. Hence, they resorted to other means of increasing their profits. Here are some ways which they have resorted to in Australia and we are already seeing this in the US.
Rise in annual fees – The article noted that on average, annual fees in Australia rose as a consequence of this rule. The post cited that the average annual fee for gold credit cards with rewards is now about $140, up from $98. The average credit card annual fee for a “vanilla” card with no rewards is $29. (bear in mind all these are in Aussie Dollars).
Declining Rewards – The post also cites a couple of examples of declining rewards. Here’s a direct quote from the article :“While it used to take 12,400 Australian dollars of spending on Visa or MasterCard from one of the country’s four biggest banks to earn a 100 dollar shopping voucher, for instance, now it takes 17,000 dollars.”.
Shortened grace period – Before these laws took effect in Australia, the grace period that Australian credit card companies gave their cardholders was about 55 days. They have now been reduced to between 33 and 44 days (which is still heck of a lot more generous than here in the US).
Retailers are finding other ways to charge consumers – What was really surprising (or perhaps it should not be) is that though retailers in Australia have had their merchant processing fees reduced, they still imposed surcharges on consumers for using credit cards (their central banks allow them to do so). Some hotel chains charge 1.5 cent surcharge fee for using credit cards and happily claim that consumers are OK with it and they actually earn a decent profit from it! Airlines also impose fees when folks use credit cards to book them.
I think this article serves as a great reminder of the consequences if we are to impose all sorts of regulations on credit card issuers. Yes, they have probably made lots of money through ridiculous charges (late fees, over the limit fees etc). But it also appears that imposing more rules and regulations will have the unintended consequences of raising the cost of using credit cards for everyone. For those who tend to get into credit card debt just from the mere presence of having them in their wallets, perhaps this is not such a bad thing. For for folks like me who pay in full and earn rewards, I can’t help but be against excessive regulations.
What are your thoughts on this?
Other interesting credit card and money posts
I spotted a few interesting posts this week. Kevin from Credit Shout wrote a very interesting post of whether it actually cost more shopping at bing.com with their cash back program?.
Miss M also just got her first credit card with rewards. It is a Starwood Amex and it looks like she will be putting some serious spending on house repairs on her card.
Finally, Matt Jabs also asking a similar question about whether credit card reforms will have unintended consequences.
Have a great weekend.
November 30th, 2009 at 23:44
As regulation cuts off revenue streams from credit cards or any financial services company, they will just find another way to fill that gap because they need to keep their profits growing. They tend to them move into slightly more unscrupulous profit sources like hidden fees.
The only way to really fix these kinds of problems from a regulatory standpoint is to impose an all-encompassing set of regulations that leaves no wholes for companies to get profits from. Of course that would be very difficult to do because of the huge lobby uproar.