In the latest round of credit-card reforms, issuers and retailers are both playing the consumer-friendly angle. Currently lawmakers are debating whether to cut interchange fees, the tab that merchants pay to card issuers each time a customer uses plastic. While retailers claim they would pass the savings on to shoppers in the form of lower prices, card companies argue the legislation will make credit less convenient and more costly—and they may be right.
Merchants have long complained about interchange fees. They say the costs, which amount to roughly 1.6% of every transaction, erode already razor-thin margins. Last year retailers, the main supporters of three bills now working their way through Congress, forked over an estimated $48 billion in card fees. "We can't keep absorbing these fees," Kathy Miller, a grocery store owner in Elmore, Vt., testified at a congressional hearing in early October.
In their quest to win over lawmakers, retailers maintain consumers won't get hurt—and may actually benefit. "Our market is extraordinarily competitive," says Mallory B. Duncan, general counsel of the National Retail Federation, a trade group. "If costs go down, that tends to drive down prices."
That's not what happened in Australia, though. In 2003 the country's regulators cut the average interchange fee to around 0.5% of the total bill, from 1%. But most retailers never dropped their prices, and credit-card issuers jacked up borrowers' fees to make up for the lost revenue, according to a report by CRA International, a consultancy. After the regulation was passed, the annual fee paid by cardholders rose by 22%, to an average of $25.65. Annual fees on rewards cards jumped by as much as 77% since issuers' profits took a bigger hit. Australian card companies generally levied a higher interchange fee on rewards cards to cover the added cost of the perks—as they do in the U.S.
Analysts worry that retailers and card issuers in the States would respond in much the same way. Already U.S. lenders have been raising rates and tacking on new charges for borrowers following a ban earlier this year from Congress on certain practices, including late-payment penalties. "When the banks have a major source of revenue eliminated, they need to raise [other fees] to make up for that," says David S. Evans, a lecturer at the University of Chicago Law School.
Any new rules could make it less convenient for consumers to opt for credit over cash. As part of the proposals, lawmakers are considering whether to let retailers set a minimum payment for purchases with plastic; they now risk paying a hefty fine for doing so. If such changes are made, customers won't be able to pull out their cards all the time. Merchants may also have the option of rejecting a specific card, like a reward card, if they think the interchange fees are too high. Currently retailers must accept all products under a single brand such as Visa. "Consumers want to be able to use their card for any kind of purchase," says Shawn Miles, MasterCard Worldwide's (MA) head of global public policy. The legislation is "anti-consumer."
Such a defense may work. A report by the Government Accountability Office, an investigative arm of Congress, due out by Nov. 19, is weighing the potential impact of proposed rules on the card-carrying masses. If the GAO finds that only merchants benefit from lower interchange fees, card companies may win. Says Brian Gardner, a vice-president at research firm Keefe, Bruyette & Woods: "If the report comes out and says there is little evidence that [the benefits] would be passed on to consumers, then I think the oxygen gets sucked out of this thing."