Joel Griffith: Big box retailers pocketed free checking account perks — now they want your credit card rewards

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Most of us don’t give much thought to the process of using a credit card. We just know it’s convenient, and we enjoy the rewards many card-issuers offer. But if Big Box retailers get their way through the Orwellian-named Credit Card Competition Act, that will change. We’ll be paying more in fees and higher interest rates while earning fewer rewards as merchants try to shift their costs onto you.

To see why, consider what happens when you use a credit card.

Quite a bit happens before and after a transaction that takes mere seconds. A network — called an interchange platform — quickly determines whether your credit card is valid and if you have sufficient credit available. And within hours of the purchase, credit supplied on your behalf by your card issuer flows through the interchange platform and is deposited as funds in the merchant’s checking account.

Hundreds of banks worldwide issue credit cards with unique interest rates, repayment terms, and rewards programs — but the number of interchange platforms are far fewer. The most common ones, of course, are Visa and MasterCard. When you apply for a “Visa” or “MasterCard” credit card from your bank, you’ve selected one of those entities as the network that will process the purchases on credit from that bank. Importantly, your bank — not the platform itself — issues the credit.

The merchant pays an “interchange fee” on every credit transaction — typically under 2%, a fee that rose only 0.1% from 2014-2020. Your bank and the merchant’s bank negotiate exactly how to split this fee. This fee enables the card-issuing bank to provide credit card rewards, protection against fraudulent purchases, and responsive customer service.

Of course, this arrangement also enables merchants to sell goods and services on credit to customers despite no pre-established relationship, no credit check, and with no risk to them should you fail to repay the loan. Importantly, your bank, rather than merchant, provides the capital — eliminating this cost to the retailer as well.

Just a generation ago, a merchant desiring to sell on credit found it necessary to conduct their own time-intensive due diligence, along with securing additional funds to finance credit issuance. Merchants also found themselves at risk of loans going unpaid – especially during economic downturns. It’s no surprise that most merchants abandoned their own credit extension programs as credit-card issuers gave them this alternative — and many other merchants who didn’t extend credit previously chose to utilize this service.

Now some in Congress want to take away this choice from you as the consumer. The Credit Card Competition Act would arbitrarily force dozens of the leading credit-card issuing banks to add at least one alternative interchange platform to process the credit transactions. In many instances, the retailer will choose the barebones, low-cost alternative. Perhaps the existing networks will choose to scale back their fees and frills as well.

In both scenarios, this congressional interference in the credit card results in diminished proceeds distributed to your bank for credit card rewards programs, fraud prevention, and customer support.

Some business groups argue that more competition is needed in the credit-card processing market. Certainly, competition helps hold down costs and improve service. However, wide competition DOES exist. Visa, MasterCard, Discover, and American Express (in addition to other payment methods) strive to be the preferred choice of the consumer and the business.

A business decides which of these platforms meets his needs. He may choose to accept credit cards regardless of the network utilized. Or a merchant may refuse to accept credit cards utilizing a network the merchant deems too expensive. For instance, it’s quite common for retailers to only accept Visa and Mastercard, rejecting American Express because the processing fees sometimes are significantly higher. Some merchants choose to reject credit-card purchases altogether, relying on cash, check, or self-financed credit purchases.

Don’t think for a second that the big box retailers will at least lower their prices in response to any reduction in processing costs. A similar situation occurred more than a decade ago when the Durbin Amendment regulation under Dodd-Frank limited debit card transaction fees. Most big retailers pocketed the savings — with only 22% lowering prices. Meanwhile, the price cap forced banks to recoup their revenue losses by adding fees and eliminating free checking for some lower-net-worth clients.

This is crony capitalism at its worst. This meddling at the behest of big box retailers amounts to more than just cost shifting — it results in higher total costs and diminished service. This is one so-called reform that should come back “declined.”

Joel Griffith is a Research Fellow in the Thomas A. Roe Institute for economic policy studies at The Heritage Foundation.


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