Could Congress Cripple the Credit Card Industry?

Washington, D.C., May 14, 2008—Thursday morning, the U.S.
House Judiciary Antitrust Task Force will consider a bill that could have a
major impact on the credit card industry.
The task force is scheduled to hold a hearing on the Credit
Card Fair Fee Act of 2008 (H.R. 5546), introduced two months ago by House
Judiciary Committee Chairman John Conyers (D-MI) and Rep. Chris Cannon (R-UT).

The proposed legislation would effectively cap interchange
fees, the prices that banks charge retailers for processing credit card transactions.
The Conyers-Cannon bill would empower a three-judge panel to set the price of
interchange fees to match the rates that would prevail in a mythical “perfectly
competitive” marketplace.

“Supporters of the bill claim that credit card companies have
excessive market power and are thus able to exert undue influence over
interchange fees,” said Center for Entrepreneurship Director John
Berlau. “In reality, the credit card marketplace is highly competitive,
with four major players and several smaller entrants, along with emerging
online payment services like PayPal.”

Interchange fee price controls will hurt U.S. consumers just as capping fees harmed
consumers in Australia.
When the Reserve Bank of Australia
capped interchange fees in 2006, consumers suffered the most: annual cardholder
fees increased and rewards programs shrank, but retail prices did not decrease
as promised, according to a recent
report by the consulting firm CRA International.

“Accepting plastic is a retailer’s choice; some merchants
choose to accept credit cards as payment, while others do not,” said Research
Associate Ryan Radia. “Interchange
fees, along with the costs of handling cash, are one of many factors that
retailers consider in selecting payment options for customers. Unless Congress
wants to turn a thriving marketplace into a dysfunctional one, lawmakers would
be wise to reject Conyers-Cannon price controls.”

CEI is a non-profit, non-partisan
public policy group dedicated to the principles of free enterprise and limited
government. For more information about CEI,
please visit our website at www.cei.org.