|by Jason Steele|
If you follow the credit card industry or the retail sector, you know that one of the biggest fights out there is over interchange fees. These charges, also known as swipe fees, are a constant source of debate as the retailers perpetually propose to do away with them. The retailers achieved a huge victory over the banks when the Durbin Amendment was attached to the Dodd-Frank financial reform bill that has since become law. The Durbin Amendment would vastly curtail the interchange fees that banks could charge retailers, but only for debit cards, not for credit cards.
Durbin In The News Again
Now, the fight is over a proposed amendment to the law that would essentially kill the Durbin Amendment. Considering that Durbin only affects debit cards, you can imagine my surprise when I heard an NPR host introduce a story about this debate over credit card fees. The actual report, like the debate itself is only confined to debit cards at the moment. The only thing I know for sure, is that it is only a matter of time until retailers and their lobbyists again propose to restrict interchange fees on credit cards. They say the only things you can’t count on in life are death and taxes. Retailers consider these fees to be like taxes, and they oppose them with all their vigor. They even try to convince gullible reporters and the public that these fees are “like a tax” on consumers, although nothing could be further from the truth. The fact that the retailers pay these fees is confirmed by studies as well as the retailers own hostility to them.
Why Is This Debate Important To Consumers?
Rather than acting as “a tax on consumers” these fee actually represent a kickback to consumers. Interchange fees are the only way that banks can pay out credit card rewards in the form of cash back and loyalty points. Just about every debit card that offers rewards is planning on canceling the program the moment that Durbin becomes effective. Should Durbin-like restrictions ever affect credit cards, you can expect all your cash back, points, and miles to disappear.
Why The Current System Is Fair
Retailers do not have to pay interchange fees. In fact, they don’t even have to take credit or debit cards at all. They are free to accept or decline cash, checks, money orders, ACH transfers, wire transfers, or any type of payment they wish. Each payment type comes with certain advantages, costs, and risks. The vast majority of retailers choose to accept credit cards and the cost of interchange fees because the costs are outweigh the advantages. These benefits include speed, security, convenience, and consumer’s ability to finance purchases. Interchange fees are a transaction cost. These have always been a legitimate cost of doing business, just like energy, labor, and capital. At the same time, consumers prefer credit cards for many of the same reasons. I myself use credit cards largely for the rewards. Take away the rewards and I will be a lot less loyal to my credit cards.
As someone with excellent credit who pays my bills on time, I always earn rewards and I never pay interest. Most cardholders do pay some sort of interest. I feel that we who pay our bills on time deserve our cash back, points, and miles as a reward for our responsible spending habits.
I Side With The Banks
Regular readers of this blog know that I am no tool of the banking industry. I can and do regularly call them out when they commit outrageous acts. I strongly supported the CARD Act of 2009, which the banks claimed would be bad for consumers. Their claims were disingenuous, just as the retailer’s claims that interchange fees are “like a tax on consumers.” There are few things that bother me as much as corporations that try to claim that something that hurts their own interests is actually just bad for consumers. Corporations, including banks and retailers, almost never share the same interests. I am happy to let them advocate for their own interests, but they should really stay out of the business of pretending to advocate for consumers. As a consumer advocate myself, I feel like they are encroaching upon my turf. Nevertheless, I do side with the banks on the issue of credit card interchange fees. The current system should not be substantially altered, although I would not oppose some modest, common sense reforms to allow interchange fees to be set with more of a market based approach.
The debit swipe fee debate is now going public as each side is advertising in order to gain popular support. It is up to you to understand the issues and make up your own mind. Whatever you do, please don’t listen to the propaganda of the retailers or the banks that claim to have your interests in their hearts.