Nonetheless, some retail businesses want a valuable service – that is, the ability for their customers to use credit and debit cards to make purchases – but they don’t like the price of this service. So, these businesses, who would fight tooth and nail to stop the government from dictating what prices they could charge, are looking for government, whether through the courts or legislation, to set the price paid for the enormous benefits that both consumers and these businesses derive from credit and debit card usage.
Consider a few points from July 16 New York Times report on the issue:
• “Merchants across the nation, from powerhouses like Wal-Mart and Home Depot, to gas stations, mom-and-pop restaurants and 7-Eleven, have spent years unsuccessfully fighting the biggest of these costs, known as an interchange fee, which generates an estimated $40 billion to $50 billion in income annually for banks that issue credit cards… Legislation is winding its way through Congress, a government audit has been ordered and petitions are surfacing in hundreds of convenience stores, including Ms. Orzano’s 7-Eleven, encouraging customers to voice their opposition to the fees.”
• “But retailers may have a tough time convincing Congress that consumers would benefit if the effective interchange rate, which has increased slightly in recent years, is dialed back. Many other countries, including Israel and Australia, have required banks that issue cards to reduce the fee. Yet there is little evidence that the savings were passed along. In Australia, where regulators required banks to cut the interchange rate for Visa and MasterCard purchases to 0.5 percent from 0.95 percent, the banks offset their loss by reducing rewards programs and raising annual fees, according to a 2008 report by the Government Accountability Office.”
• “Banks say they incur substantial risk when offering credit cards, and must make enough of a return to continue to extend credit. Reducing interchange fees would cut profit at both the largest and smallest financial institutions, including community banks and credit unions, Mr. Clayton said.”
• “Still, while legislation on interchange fees would not have stood a chance a few years ago when the economy was buoyant and banks were not under the political spotlight, the winds on Capitol Hill have shifted as public anger at banks — and credit card companies — has grown.”
Businesses understandably want to cut costs, but perhaps they need to look at the bigger picture, including the negative consequences when government in effect sets prices. It means less innovation, less investment, and reduced availability of credit.
Checking out SBE Council’s recent report titled “Credit Cards and Small Business” would help.
Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council
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