Congress Has No Business Regulating Interchange Fees

by Odysseas Papadimitriou on June 26, 2009

swiping-credit-cardDisagreements between merchants and banks concerning interchange fees for credit card purchases have prompted Democratic Senator Dick Durbin to introduce yet another piece of credit card legislation to the U.S. Senate floor.  The new legislation would create a panel of judges to help facilitate a settlement between the merchants and banks.  With four major credit card networks out there (MasterCard, VISA, Discover and American Express), and a wide variety of private label cards issued by large merchants, it’s hard to see why the government is being asked to step-in to settle this dispute. 

We’ve already seen the government step in to help regulate the credit card industry via the Credit CARD Act of 2009.  We support the CARD Act on the position that the legislation was needed to stop the deceptive practices being used in the industry, which prevented consumers from being able to accurately estimate the true costs of obtaining a credit card.  However, this does not mean that government regulation is needed in all aspects of the credit card business. 

Given that there are a number of credit card networks in the market, there is no monopoly on interchange fees.  Additionally, none of these networks are using practices that make it hard for merchants to estimate the true cost of accepting credit cards.  As such, free market principals ought to make setting the rate on interchange fees a self-regulating practice. 

If merchants feel that they have no choice but to pay high fees for purchases made with credit cards, they can offer a discount to customers paying with cash.  Alternatively, large merchants could come together and create their own credit card network that competes with MasterCard, VISA, etc.  Nothing forces a merchant to accept all types of credit cards.  What is clear, however, is that Congress has no business in this area.

Disclosure: Some of the links point to CardHub.com, which is owned by the same parent company as this blog.

Discussion

Jeremy
"If merchants feel that they have no choice but to pay high fees for purchases made with credit cards, they can offer a discount to customers paying with cash."

Nearly every credit card processing agreement I've seen expressly prohibits that action. If it were a cost that could be passed on discriminately between cash vs credit card buyers, merchants wouldnt be complaining. As it is, 85% of all interchange fees go to the Visa and Mastercard networks. That seems very monopolistic to me.
November 10 at 15:58 pm

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