Photo (cc) by skpy
This post comes from partner site LowCards.com.
On Monday, the Justice Department sued Visa, MasterCard, and American Express for anti-competitive practices. At the same time, it reached a proposed settlement with Visa and MasterCard. The ruling aims to end anti-competitive practices and allow customers to save money, but it is likely to also have unintended consequences for consumers.
Interchange Fee is Confusing
Interchange fees, or swipe fees, are difficult to understand, and credit card processors like Visa, MasterCard and American Express have provided very little information about these fees, protecting their control and this significant revenue source.
Interchange fees began in the 1960s to help banks to cover the cost of processing credit card transactions. The fee is divided between the merchant’s bank, the consumer’s bank and the credit card company. The fee covers processing fees, billing statements, fraud protection, innovations, and other expenses.
Interchange fees typically range between 1.0% and 3.5% of every purchase made with a credit card. Few consumers realize how much the merchant pays for the convenience of credit cards. There is no mention about the fee in the credit card terms and conditions, and merchants have been prohibited from mentioning swipe fees to customers. Merchants argue that these fees have inflated the cost of goods, especially for the consumer that pays with cash instead of a credit card.
Interchange fees are not a flat rate for every merchant. They can vary by industry, the method of card acceptance, the merchant’s volume, the type of card, transaction size and special deals. For example, many grocery stores and utilities have lower interchange fees as a special incentive from the networks, but interchange fees may be higher for merchants in industries such as travel and entertainment because customers spend more with their credit cards.
Visa, MasterCard, American Express and other processors have enforced this system as long as possible because it is a large source of revenue. Last year, Visa, MasterCard, American Express, and their affiliated banks collected $35 billion in swipe fees.
Currently, retailers and merchants must accept all cards in the payments network but they can not provide discounts or guide customers to individual cards or alternative payments, even if these cost less to process. The Justice Department ruled that this is anti-competitive.
In the settlement, Visa and MasterCard will no longer prevent merchants from offering immediate discounts or rebates for using a particular card or other form of payment. Merchants can also give preferential treatment to a card or card network, and they can promote particular cards in communication with customers. Merchants can also inform consumers about their costs incurred from the use of a specific card.
The settlement allows any merchant that only accepts Visa and MasterCard to start immediately. Since American Express is not participating in the settlement, many merchants that accept American Express along with Visa and MasterCard will not be able to take full advantage of their new options under the proposed settlement.
Effect on Consumers
“This verdict will create change for the credit card issuers, merchants, and consumers. It will be interesting to see how this is implemented and how consumers respond. For the first time, merchants will be able to direct customers to the cheapest payment. How aggressively will they promote this?” says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. “The payment choice is still up to the customer. Will they embrace the discounts or continue to use the same cards to accumulate their rewards?”
It is unclear how this will trickle down to consumers. Notices and additional choices can add confusion to checking-out, making lines and waiting even worse at the cash register. Shoppers using cash to take advantage of discounts will also take more time as they count out their payment. Shoppers also spend less when they pay with cash.
Possible Response from Credit Card Issuers
Even though the verdict is against Visa, MasterCard, and American Express, it will spillover onto all other credit card issuers. If consumers switch to cheaper cards or alternative payments, it will not only decrease the amount of interchange fees revenue for banks, but also their interest revenue.
“On a number of occasions, we have seen these rulings against banks and credit card companies have unintended consequences on consumers. This verdict is another blow to credit card revenue during a time when issuers have been slammed with new rules and restrictions following the financial crisis. We expect the issuers will likely respond with higher rates and fees on credit cards and other bank services in order to make up for this loss in revenue,” says Hardekopf.
Credit card analysts are split on how issuers will react to this development. Some feel credit card issuers may increase incentives for using reward cards. Perhaps issuers will tie cash and point bonuses to certain spending levels, providing a reason to continue using the credit card. Some issuers are already doing this: the Discover More card offers a $100 cashback bonus after one makes $500 in purchases within the first three months; the Chase Freedom Visa gives a $100 bonus if one spends $799 in the first three months.
On the other hand, some analysts believe this will decrease credit card rewards. For years, some believed that the rewards system was financed by the interchange fee. If the revenue from the interchange fee decreases, rewards may also decline. 71% of credit cardholders held a rewards card in 2008.