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Don't Change Interchange

Overstock.com President Jonathan E. Johnson recently penned an op-ed that appeared in The Washington Times last week in which he argued for government regulation of credit card interchange fees. I responded to his essay in a letter to the editor that ran in Sunday's Washington Times:
Overstock.com President Jonathan E. Johnson III overlooks several important facts regarding credit card interchange fees ("Retailers, consumers squeezed," Opinion, Wednesday). Much of the $48 billion in interchange fees paid to credit card companies ends back in consumers' pockets in the form of credit card rewards. Frequent-flier miles, redeemable bonus points and cash-back programs are all financed largely by interchange fees. Consumers can earn rewards totaling 1 percent or more of the amount of purchases made on a credit card. If interchange fees are as abusive as Mr. Johnson claims they are, why does Overstock.com continue to accept them? The answer is simple: Consumers like the convenience and security of credit cards, and retailers make more than enough from credit cards through increased sales to pay for interchange fees. Retailers unhappy with interchange fees always have the option not to accept credit cards. (Costco Wholesale Corp., for instance, does not accept MasterCard or Visa credit cards.) Government price controls on interchange fees will shrink rewards programs and force increases in annual cardholder fees - as happened in Australia in 2001, when the Reserve Bank of Australia capped interchange fees. Congress should heed Australia's experience before interfering with the payments marketplace.
There are, of course, several other serious objections to legislative proposals aimed at curbing -- or abolishing -- credit card interchange fees  (I've blogged on these issues before here and here).  Some members of Congress are supposedly pondering re-introducing the Credit Card Fair Fee Act, which failed to make it out of committee in the last session.  Stay tuned to OpenMarket.org for the latest on the interchange fee debate.