Downside of the ‘Credit Card Fair Free Act’
Here’s another perspective of the new proposed legislation…
According to information released by the Federal Reserve, American’s now hold approximately $1 trillion in credit card debt. Many claim the “Credit Card Fair Fee Act” proposed by Congress could provide cost savings to merchants and consumers alike. The legislation, which would fix the rates that merchants pay to accept credit cards may be good news for retailers, but could have disastrous results for consumers. Although consumers overwhelmingly support the new credit card legislation, fees on every financial related product, including checking accounts and credit cards, could rise to cover the cost of doing business with a credit card - effectively transferring the cost from merchant to consumer.
Interchange fees of 2% - 3% are currently paid by merchants to cover the cost of credit card transactions. Business owners don’t have to worry about consumers’ checks bouncing, extending credit or having large sums of cash on hand. Businesses who use credit cards also save on labor costs, with fewer employees needed to handle bookkeeping. Transaction records are automatically stored on the bank’s computer system, making accounting much easier.
With 40% of all consumer transactions being made with plastic, retailers see the importance of accepting credit cards, but obviously prefer not to pay the interchange fee. They decided to lobby the government to give them a special anti-trust exemption that would lower their costs; effectively forcing negotiations for 90 days on interchange fees.
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 there’s no guarantee that the savings retailers see will be shared with consumers. Not only could shoppers miss out on any savings, they could also be saddled with higher fees and lose great perks.
Card issuing banks will now need to recoup their losses elsewhere. Shoppers could say goodbye to cash back rewards, 0% APR offers and no annual fee cards.
Ordinary banking customers would suffer, as well. There’s also a good chance that your free checking account is actually subsidized by interchange fees on debit cards. If the proposed laws are put into effect, banks will simply stop offering free-checking, charging consumers to cover the interchange loss. More than a million seniors receive state benefits and Social Security via prepaid cards. Their ability to access their funds would be compromised as well, if retailers were unable to reach a negotiation with the issuing bank.
In a real life example, Australia’s recent interchange cap has shown no discernible impact on prices that consumers are paying. Consumers there now pay extra fees at the register when they use a card and no longer are offered no-annual-fee cards.
Congress may want to help out Americans with their debt, but have misdiagnosed the problem according to many banking and financial experts. Americans need to learn to live within their means. Giving retailers a reprieve on interchange fees and allowing them 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 credit card debt.
Learn more about the Credit Card Fair Free Act, H.R. 5546 >
