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Aiming at credit-card fees, Congress shoots consumers in foot

POSTED: August 9, 2008 5:00 a.m.
Americans hold nearly $1 trillion in credit-card debt, according to data just released by the Federal Reserve. Now Congress wants to make that burden even heavier. Some misguided lawmakers are pushing legislation that would saddle consumers with fees that retailers don't want to pay.
Under the deceptively named "Credit Card Fair Fee Act," Congress would effectively fix the rates that merchants pay to accept credit cards. That'd be good news for retailers. But it would be disastrous for consumers, who could see the fees on everything from their credit cards to their checking accounts rise.
To see why congressional intervention would harm consumers, it's important to understand how credit- and debit-card transactions work.
When you swipe a card at the local store, the storeowner typically keeps just over 98 percent of the purchase price. The remaining 2 percent goes from the retailer's bank to the bank that issued your card, or perhaps your local bank or credit union. It's called an "interchange fee."
Why do retailers accept this cost?
For starters, credit card transactions are guaranteed and secure. Storeowners don't have to worry about a consumer's check bouncing, extending credit, or having huge sums of cash on hand.
Credit cards also reduce labor costs. Clerks don't have to waste time counting change or tabulating receipts. Transaction records are automatically stored on a computer system, making accounting a breeze.
And credit cards are popular with consumers. About 40 percent of all transactions are conducted using plastic.
Despite all the advantages of credit cards, storeowners would obviously prefer to avoid that 2 percent fee. So they've decided to put pressure on Congress to lower their costs.
Specifically, they've lobbied the government to give them a special anti-trust exemption. If such a law were passed, all the retailers could form a massive cartel.
Payment systems and retailers would be forced to negotiate for 90 days over interchange fees. If they did not come to an agreement, retailers could then collectively boycott an entire credit card network. In other words, consumers would be denied the ability to pay with their preferred method.
Retailers claim such "negotiation" is necessary to lower prices for shoppers, who supposedly pay higher prices at the checkout counter to offset interchange fees.
But that's a misleading argument. In truth, if retailers collude to negotiate lower interchange fees, consumers won't see any savings. Instead, retailers will simply pocket the difference.
Just look at what's happened in other countries. Australia recently capped interchange fees, just as the current congressional proposal would effectively do. The cap had no discernible impact on prices paid by consumers.
Not only would shoppers miss any savings, they could also be saddled with higher fees and lose some great perks.
With retailers getting a free ride courtesy of Uncle Sam, card-issuing banks would need to recoup their losses elsewhere - by either raising fees on credit-card owners or ditching carrots like frequent-flyer rewards. Shoppers could say goodbye to no-annual-fee cards.
That's exactly what happened in Australia. Consumers there now pay extra fees at the register when they use a card.
Ordinary banking customers also would suffer. Do you have a free checking account? If so, there's a good chance that it's partly subsidized by interchange fees on debit cards.
Banks make money on free checking accounts by pairing them with debit cards. If politicians render that arrangement unprofitable, banks will simply stop offering free checking. And you'd have to pay the bank to maintain an account.
Seniors and others who receive state benefits would suffer at the hands of this proposal too. More than a million people nationwide receive their Social Security and other benefits on prepaid cards. If retailers decide to boycott plastic, these vulnerable consumers would be unable to purchase necessary items like groceries or medication.
This measure would also hurt those without bank accounts. At low-wage jobs, it's increasingly popular for employers to issue paychecks on pre-paid debit cards. These "payroll cards" provide enormous benefits. They eliminate hefty check-cashing fees, reduce the need to carry cash, and offer employees the ability to make purchases just about anywhere.
It's understandable that Congress wants to help Americans in debt. But our politicians have completely misdiagnosed the problem - which isn't credit card companies, but people living beyond their means. Giving retailers more money through regulation of interchange fees won't solve this.
Allowing retailers to form a cartel is special-interest politics at its worst. And shifting fees from merchants to consumers will do nothing but drive shoppers further into debt. Simply put, there's nothing fair about the Credit Card Fair Fee Act.

Terry is the chief public advocate of the Consumers Rights League, a non-profit, non-partisan, educational organization dedicated to preserving consumer choice in the marketplace.
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