The Price of Credit-Card Convenience Is Not a Matter for Big Government

Card is $8, cash is $7,” said the taco-truck employee to me. I paid for my tacos by card because I rarely carry cash, and $1 isn’t a meaningful discount to me. However, when I get a scheduled massage, I pay with cash to receive the more meaningful $10 discount. This means that the slight inconvenience of remembering to bring cash is of equal or lesser value to me than the $10 expense I save. However, with Congress considering the Credit Card Competition Act and the Federal Reserve proposing changes to debit-card regulations, consumers may lose the ability to freely negotiate these payment preferences with merchants, thereby risking benefits that range from credit-card rewards to basic banking services.

Retailers claim this cash discount — or credit surcharge — exists because there is a cost to businesses for processing a credit or debit card. But it may also be that retailers assume correctly that they can extract more money from consumers who prefer the convenience of paying by card. For example, the $1 credit-card charge for my $7 tacos is about a 14 percent price increase. Yet the average credit-card-processing fee (also called the “interchange fee”) for businesses is only 1.5 to 3.5 percent of each transaction.

An odd aspect of the discount bias toward cash is that merchants should logically prefer credit or debit. Indeed, there are costs and risks associated with payments in cash (or check) that payment cards either alleviate or eliminate entirely. Benefits of accepting card payments include faster transactions at the register, easier tracking of payments, reduced risk of non-payment (such as a bounced check), protections against employee theft, and streamlining operations. Of course, there is also the fact that most people carry a credit card. And there are plenty of hassles when primarily dealing with cash, including training workers to use the register, physically transporting cash to the bank, risking the accidental acceptance of counterfeit money, keeping small bills and coins to make exact change, and accounting the till. 

The history of how businesses, like my local taco truck, wrangled with lawmakers over whether they could legally charge less for cash payments traces back to a series of legal battles in federal court and congressional action.

Credit-card transactions became increasingly common towards the end of the 1960s, so card companies and businesses worked through the challenges of rolling out this new financial tool. In the earlier days of credit cards, when purchases were less seamless than tapping an iPhone, businesses were charged between 3 and 6 percent to process an American Express card payment. Back then, processing a credit-card transaction involved physically imprinting the card details onto carbon-paper slips and often verifying the transaction over the phone, a far cry from today’s instant digital processing. As processing has become less cumbersome, AmEx processing fees have also fallen, and now range closer to the lower end of the national average. Like today, some businesses offered a discount for cash payment or imposed a surcharge for using a credit card.

Historically, card companies didn’t want two prices presented to the customer because it seemed like there was a penalty for paying by card. Issues over this new dual-price system were somewhat addressed in 1968 when Congress passed the Truth in Lending Act, which explicitly allowed merchants to offer cash discounts to customers. However, there were still disputes between card companies and merchants over how prices were presented to the consumer, specifically regarding surcharges.

In 1976, Congress amended the Truth in Lending Act to address surcharges. While cash discounts were still allowed, the amendment prohibited surcharging customers who use credit cards “in lieu of payment by cash, check, or similar means.” This amendment struck a balance by allowing businesses to offer cash discounts while preventing the credit-card surcharges that concerned card companies. Since that amendment sunset in 1984, it fell on the states to decide policies on discounts and surcharges, and they have managed that responsibility well. Today, most states allow businesses to add card surcharges as long as they are fully disclosed upfront. For example, New York issued its Credit Card Surcharge Guidance this year, clarifying that merchants can offer a percent discount for cash purchase, but they cannot notify a customer that they will be charged a fee for paying with card. 

Unfortunately, some politicians and bureaucrats are not content to let consumers and merchants negotiate these decisions for themselves. Currently, Congress and the Federal Reserve are pondering ways to dictate market terms for consumers, merchants, and financial institutions. The Credit Card Competition Act would almost certainly come at a cost to consumers: By forcing a reduction of credit-card-processing fees, the law would incentivize card issuers to reduce or eliminate card rewards valued by customers to boost savings.

Meanwhile, the Federal Reserve’s regulatory revisions could have harmful consequences, since they slash existing price caps on what debit-card issuers can charge retailers for processing a transaction by more than one-third. This will shift even more of the costs of debit-card processing to consumers, as my colleague John Berlau has written in comments to the Fed. When this regulation was originally implemented in 2011 under the Durbin Amendment, the results were disastrous for consumers. Banks reduced free checking-account offerings for low-balance accounts, and debit-card rewards almost entirely disappeared; a study found that the Durbin Amendment contributed to more than 1 million Americans becoming unbanked.

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