Gas prices have climbed to record highs for many reasons, including expensive oil, cheap dollars, and strained refineries. But some have offered an especially novel explanation for consumers’ pain at the pump: credit card interchange fees.
A retailer-backed lobbying organization ran a full-page ad in the Washington Times yesterday in support of a bill being considered in the House of Representative to cap interchange fees. (We’ve discussed the potentially disastrous implications of the legislation in several blog posts and a media statement.)
The ad plots the growth of interchange fees next to the increase in gasoline prices, claiming that steadily rising credit card fees are eating into gas station owners’ profits, translating into higher prices at the pump.
Speaking of the pump—when I fill up my gas tank, I usually pay at the pump with a card. This saves my time and eases the station attendant’s workload. And in the middle of the night, when most stations are closed, you can still often buy gas by paying at the pump.
A decade ago, paying at the pump was rarely offered, and many stations didn’t even take plastic at all. Over time, credit cards acceptance has grown as gas stations have come to realize that accepting cards is worth it, despite interchange fees.
Blaming interchange fees for high gas prices is like blaming the “bridge to nowhere” for the mounting federal deficit. Credit card fees represent just a tiny portion of the cost of gasoline, and even if they were eliminated, gas would be at most just a few pennies cheaper.
If gas stations can’t offer competitive prices because of interchange fees, they can always go cash-only. As bargain-seeking consumers grow more willing to shop around town for the best deals on gasoline, savvy station owners are free to stop paying interchange fees. Gas stations could even undercut competitors’ prices by accepting cash exclusively.
Still, handling cash and coins isn’t free. It necessitates cash registers, armored car services, security measures, and also increases the risks of theft and fraud. As consumers have flocked to credit cards, gas stations now process less cash, reducing the implicit transaction costs of handling cash. But unlike interchange fees, there isn’t a line on gas stations’ general ledger for “cash handling costs.”
There is little reason to believe that cutting interchange fees will actually translate into cheaper gas prices. Australia’s experience with interchange fee price controls strongly suggests that merchants will pocket the savings from lower fees instead of cutting prices for consumers.
Even if lower fees actually result in cheaper gas, consumers would still end up paying in other ways. To make up for lost revenue, card issuers would likely increase annual cardholder fees and cut back on rewards benefits. What’s the point of price controls if they merely shift consumers’ dollars from one pocket to another?