Most Americans swipe credit cards without thinking twice. But our ability to do so is under attack. Seven years ago, a group of retailers launched a lawsuit alleging that card issuers unfairly dictate merchant credit card fees. Although the parties agreed to a legal settlement, some retailers are threatening to renege. They should give up the fight.
At the heart of the dispute are interchange fees, the fraction of each credit card transaction that the card’s processor retains. Every time a consumer swipes, the retailer pays around 2 percent of the purchase price to the processor, who splits the fee with the card-issuing bank.
Merchants claim that MasterCard and Visa constitute a “duopoly” that fixes the price of processing credit cards. If the merchants pull out of the settlement, the factions could go back to court. The threat of de facto price controls on electronic payments would hang over the market.
Price controls on interchange fees would create market shortages and diminish incentives for innovation and growth. Consumers would foot the bill. Furthermore, the economics are not on the retailers’ side.
Competition in the payments industry is robust. Visa and MasterCard face competition from card issuers like Discover and American Express. Companies like PayPal are expanding their market share. And consumers can always use cash. Because of such competition, credit card networks cannot impose high rates with impunity. Setting interchange fees takes careful balancing between the value created and costs incurred by card-processing services.
Credit cards have revolutionized how we pay for things, to the benefit of consumers, retailers, and the economy. Interchange fees underwrite these benefits.
The instantaneous processing of credit cards guarantees that merchants will be paid and decreases the likelihood of fraud. And they leave merchants with less cash on hand thereby reducing the risk of theft.
Interchange fees have allowed credit-card companies to drop annual fees by half since 1990. They empower card companies to offer popular rewards, such as cash back or frequent flyer miles. Because of the settlement, Visa, MasterCard, and several banks are set to pay $7.25 billion to retailers. Merchants have the right to charge customers extra for paying with a credit card, if legal in their state. They can negotiate collectively over future interchange fees.
A robust electronic payments market benefits consumers and retailers. This settlement represents a good outcome for all parties and allows the innovations that have occurred in payments to continue.
Wayne Winegarden is senior fellow at the Pacific Research Institute and a contributing editor to EconoSTATS at George Mason University in Fairfax, Va.