Someone Has to Pay the Piper

As the cliché goes, the piper must be paid. And when the government decides
that some folks are paying the piper too much, others will likely have to pony
up more. This is what will likely be the aftereffects of the “Credit Card
Holders Bill of Rights” that President Obama will likely sign this week and
similar pieces of legislation being proposed. The reason? The measures are not
so much focused on improved disclosure, which would benefit all consumers, as
they are with subsidizing one group of credit card users at the expense of

The pending “bill of rights,” for instance, codifies the unwise decision of
the Federal Reserve last year to ban so-called universal default. Under this
longstanding practice, credit card issuers would sometimes raise rates as a
result of defaults on a different credit card or loan, because these defaults
may have signaled a weakening in a consumer’s credit profile.

This practice may seem harsh on the surface, but it is perfectly sensible
risk management practice similar to insurance companies’ raising rates for
drivers who get traffic tickets, even if it wasn’t while driving the car that
was insured. The issue is that the overall risk profile is changed because of
certain types of behavior, and issuers could price this into their rates.

Fortunately, Congress was wise enough – this time — to turn down a much less
deserving group who wanted to shirk what it had to pay the piper: the nation’s
retail lobby. Some of the biggest merchants, such as Home Depot and, were belly-aching about the “interchange fees” they have to pay
to process consumer transactions, and bipartisan amendments were introduced that
would have put back-door price controls on these merchant fees. Congressional
leaders wisely rejected these amendments that would have been a massive subsidy
for some of the nation’s biggest retailers at the expense of consumers and the
community banks and credit unions that issue credit cards.

Experience with these interchange fee controls in Australia demonstrates that
consumers pay for this cost-shifting through higher fees on the consumer side
and fewer “rewards” such as airline miles. The case of Australia also
demonstrates, as one of its officials acknowledged last week at a Federal
Reserve conference in the U.S., that there is no corresponding decline in
consumer prices on the retail side. In Australia, the merchants simply pocketed
the savings from the reduced fees at the expense of consumers. Congressional
conservatives and liberals, like Debbie Wasserman Schultz, Democrat of Florida,
have recognized that price controls on interchange fees can harm consumer
interests, and hopefully these wise voices will prevail.