Credit card merchant fees (also called interchange fees) are the latest target of politicians, consumer groups and some retailers. I for one, though, don't really mind these under the radar fees for several reasons.
Lawmakers have decided to take their campaign against the credit card industry beyond the sweeping new provisions of the new credit card law known as the Credit CARD Act of 2009. Congress has also started investigating restrictions involving credit card merchant fees. These fees are paid by merchants every time you swipe your card and many merchants are crying foul. However, I feel like Washington should exercise caution when it comes to targeting interchange fees, for a few reasons:
1. Interchange fees power our payment grid.
Credit card interchange fees cover the costs of maintaining the invisible network that connects the swipe pad at your favorite stores to the database at your bank. Think of an interchange platform as a series of interstate highways that gets the money from your credit card or checking account into your merchant's cash register. Those credit card merchant fees amount to about 2-3%, depending on the relationship your vendor has with credit card issuers. If you've written a check at a retail store in the last few years, you'll appreciate the time saving value of a reliable, secure payment platform.
2. For rebate cardholders, credit card interchange fees boomerang back.
If you enjoy cash back rebate credit cards, frequent flyer mile cards, or other credit card rewards like I do, you're really just getting back a chunk of the interchange fees that you already pay for goods and services when you use plastic at the checkout counter. Personally, I don't mind if other consumers cover the costs of some of the bigger rewards in the industry, like the 5% rebates I get on gasoline using my rebate credit card ! Should I feel bad if consumers that pay by cash or check help subsidize my rewards? I think not. Credit card merchant fees also help to cover the costs of various free credit card benefits, such as extended warranty and insurance programs.
3. Clamping down on interchange fees won't reduce prices.
Payment processing costs have been absorbed by retailers' markups for years and I doubt if prices for goods and services will be lowered much, if any, if another law passes. On a related note, many retailers spend far more money on their cash handling systems than they do on merchant fees.
I know a manager of a major retail store who drops thousands of dollars into her safe each night, while processing four times as much revenue through her merchant credit card account. Yet, the amount she pays in interchange fees wouldn't cover the cost of her daily armored car service or the salary of the cashier that spends two hours each day making change.
Smaller stores that prefer not to accept credit cards may feel like they're improving their bottom line, but studies indicate that consumers buy more on credit cards than they ever do with cash or checks.
4. Our time and attention should be focused on more important things
Instead of worrying about credit card interchange fees that merchants pay for valuable services, let's encourage our lawmakers to revisit the watchdog spirit that brought us the CARD Act in the first place. Payday loans, shady debt collectors, and fraudulent credit repair operators damage the financial lives of Americans every day. Rather than squeeze money from legitimate businesses, Washington should clamp down on companies that prey on fear, mistrust, and financial desperation. On a related note, more emphasis should be put on financial education.
Lawmakers struck a chord with consumers when they limited some of the credit card industry's worst practices. Now it's time for them to help our economic recovery by supporting the growth of our electronic payments network. I'm all for merchants being able to negotiate fees and a level playing field (which is what proponents of legislation curtailing credit card merchant fees claim they want). And, I think if fees are indeed not negotiable as proponents claim, then the government should step in.
But, at the end of the day, if a merchant is upset about paying fees, then why don't they just stop taking plastic all together? Call me crazy, but I'm going to go "out on a limb" here and speculate that it just might be because it would hurt their business quite a bit more than help. I would certainly welcome your thoughts!