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Gov’t Watchdog Finds Credit Card Price Controls Hurt Consumers
GAO Evidence Points to Australian Real-World Example
Washington, D.C., November 19, 2009—Today, the Government Accountability Office released its widely anticipated report on interchange fees -- the fees that retailers pay to credit and debit card issuers for processing transactions. John Berlau, Director of CEI's Center for Investors and Entrepreneurs, argues that the GAO's findings demonstrate how government-imposed limits on these fees would hurt consumers, credit unions and community banks:
Today's GAO report throws some much needed cold water on the misleading claims of big merchants such as 7-Eleven Inc. and shows the campaign for interchange fee controls for exactly what it is -- a self-interested push by retailers to shift credit and debit card processing costs to consumers. If Congress restricts interchange fees, "consumers may face higher costs for using their cards," the GAO concludes, and "may not experience lower prices" from retailers, who could pocket the entire windfall they receive from these proposals.
The GAO draws on the recent experience of interchange fee caps in Australia, where consumers have been socked with annual fees and suffered from a reduction in rewards such as airline miles to make up for retailers' reduced payments. Consumers in Australia did not see any tangible reduction in prices stemming from retailer savings. The GAO further notes that the Australia's central bank "estimates that fees to merchants were lower by about 1.1 billion Australian dollars for the period of March 2007 through February 2008, but officials acknowledged that it would be very difficult to provide conclusive evidence of the extent to which these savings have resulted in lower retail prices"
The report also found strong evidence that interchange controls would make it harder for community banks and credit unions to compete in offering credit and debit cards. "With less interchange fee income, representatives of smaller issuers such as community banks and credit unions told us that they likely would not offer rewards cards and therefore would be unable to compete with the larger issuers in the market," the GAO says.
In addition, interchange fee controls would also hurt the thousands of charities and alumni associations that rely on "affinity cards" for fundraising. These cards work under the same mechanism as "rewards cards" -- consumers are basically giving the "cash back" to certain causes -- and the cost-shifting would hit these groups as well, potentially causing billions in dollars in losses for our nation's charities in these troubled times.
Finally, the report shows that though the interchange fees merchants pay have increased in some cases, so have the benefits credit and debit card issuers provide to both card holders and retailers. The GAO points out that "merchants can receive faster and more certain payments from customers using cards," and that "card acceptance also can reduce the time merchants' customers spend at checkout and can reduce labor costs."
Congress should heed the wise words of its own watchdog and refrain from placing controls on interchange fees that would enrich some retailers at the expense of consumers, charities, credit unions, community banks and ultimately, innovation in the American economy.