I don’t visit ATMs much anymore. Instead, I mostly rely on credit cards. Credit cards are now accepted by all kinds of stores, from small, family-owned restaurants to national department stores. And since many credit card transactions no longer require a signature, paying with plastic is quick and easy, eliminating the need for cash withdrawals and coin-filled pockets.
Yet this recent explosion of credit card use may soon come to a halt thanks to a new law under consideration in Congress. CNN reported last Friday that merchants are lobbying hard for new legislation to regulate interchange fees (the charges credit card companies assess retailers whenever a card is swiped). These fees have drawn the ire of retailers, who pay around 2% of each transaction to the credit card issuer.
Despite being widely demonized, interchange fees have an upside. Many card-holders benefit from rewards programs made possible by interchange fees. For example, on my Bank of Americard, I get the equivalent of 1% cash back of all purchases I make. And since my card has no annual fees, I actually save money paying by card instead of cash. Not to mention the simplicity of paying my credit card bill with just a few clicks online, electronically transferring funds from my checking account without the hassle of paper statement.
Nobody is forcing retailers to take credit cards. If a business doesn’t want to pay interchange fees, it is free to go cash-only, or accept checks instead. Still, most shops gladly take plastic, because they’ve realized that customers spend more when they can pay with a credit card.
Retailers say regulation is needed because card issuers supposedly collude to keep prices high. But there is competition among credit issuers, as the Wall Street Journal recently observed, and it has intensified in the past few years. Visa and MasterCard may be the most ubiquitous, although many retailers also accept American Express and Discover, and online credit card alternatives are coming on strong. Claims of oligopoly are tenuous, and there’s no justification for imposing price controls on the credit card market.
Credit card usage has spiked since 2000, and is slated to keep growing quickly. But if Congress punishes credit card companies for being too successful, the market for new payment methods will stagnate, and consumers will be stuck using dumb currency in a smart economy.