Credit card ricochet
"Partners in plunder." That's how an intriguing new book describes the hidden relationship between big government and big business. <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
In "The Big Ripoff," investigative reporter Timothy P. Carney, now a journalism fellow at the Competitive Enterprise Institute, takes on the media myth that business staunchly opposes government intervention. Often, Mr. Carney writes, companies actively lobby for government regulation to help their bottom line, while cloaking themselves in the rhetoric they're acting in the public interest. When this happens, Mr. Carney writes, usually "the regular guy gets ripped off."
A case in point is a big ripoff being attempted now by some of the nation's biggest retailers. These stores think the fees they pay to banks to process credit card transactions are too high, and they want the government to step in with price controls. They're taking out newspaper ads saying these fees raise prices and punch consumers "in the gut." But a wealth of evidence shows consumers will be hit in the wallet if the retailers' demands go through.
At issue are the payments called interchange fees charged to stores by banks that issue Visa and MasterCard. Retailers, including the powerful Safeway grocery chain and Eckerd pharmacy chain, contend in lawsuits and an appeal to state and federal government that the fees are too high and the method of pricing is anticompetitive. Mitch Goldstone, an online retailer, complained to the Internet journal ATM Marketplace that the fees are "unjust" and that businesses "have little recourse but to accept the fees."
Critics like Mr. Goldstone also contend the fees violate antitrust laws because Visa and MasterCard set uniform fees for member banks to charge. But courts, so far, have rejected this argument because there are other credit cards and payment methods, and because of the efficiencies of this pricing system. Were this fee-setting method not in place, stores would have to negotiate with thousands of different banks to get customers' credit cards processed.
Tellingly, the retailers don't want these transaction costs either and are not calling to end the network of uniform fees the credit card companies have created. Instead, they want the courts or bureaucracy to intervene and set rates that Mr. Goldstone and others describe as "cost-based." But there is some dispute as to how much these "costs" are and how the government can discern them.
And, of course, the hypocritical retailers do not sell their own goods for "cost-based" prices. Like the banks and credit card companies that are the targets of their complaints, retailers try to make as much profit as they can. That's capitalism.
What these retailers are really trying to do is shift more of the processing costs to consumers who hold the credit cards. This cost-shifting is exactly what happened in Australia when the government granted merchants' wishes and set the fees.
When the price controls were pushed through Down Under, Aussie consumers were hit with higher annual fees and fewer reward programs like frequent-flier bonus miles. One study found 30 percent to 40 percent of banks' lost interchange revenues were simply picked up by cardholders through higher costs to them. And these consumers saw no corresponding decrease in prices they paid for goods, according the newspaper the Australian, though Aussie retailers saved more than $450 million in U.S. dollars.
If price controls are enacted in the U.S., consumers here too will likely "bear the brunt of this policy," says a paper by Wayne Brough, chief economist of Washington-based FreedomWorks. This is because, here as in Australia, consumers "are a diffuse and dispersed group" who have a hard time competing with "organized special interests seeking to use the political process to achieve gains unavailable in the marketplace," Mr. Brough writes.
Government control of interchange fees could also harm innovation in the dynamic U.S. economy. Many small businesses are beginning to use special credit cards in lieu of loans to finance equipment and supply purchases. If these startup entrepreneurs had to pay substantially more for this option, many couldn't get their businesses off the ground.
Retailers are not forced to carry Visa and MasterCard, and there are other credit cards and payment methods that ensure competition in fee-setting. Costco, for instance, will only accept purchases made with the American Express credit card and certain types of debit cards. The government should also clear barriers to retailers, if they choose, setting up joint ventures for new payment methods.
But we should not let the retail industry use the instruments of the state to accomplish nothing more than a big ripoff of their customers.