Retailers are no doubt popping open the champagne to celebrate the Department of Justice’s settlement of a lawsuit challenging rules that American Express, MasterCard and Visa have in place to ”prevent merchants from offering consumers discounts, rewards and information about card costs, ultimately resulting in consumers paying more for their purchases.”
Merchants have been complaining for years that the fees they pay the credit card companies every time they accept a credit card are too high. These interchange fees amounted to about $35 billion last year. Merchants have filed numerous lawsuits alleging “price fixing,” among other things, over the years, and there have been various attempts to regulate the industry through legislation. For the most part they have been unsuccessful, though the “Walmart case” and the recent “Durbin Amendment” in the Wall Street Reform legislation both opened the door to lower debit card transaction fees. But the rules for credit card purchases remained pretty much untouched.
This settlement changes that. According to a DOJ press release, the proposed settlement requires MasterCard and Visa to allow their merchants to:
- Offer consumers an immediate discount or rebate or a free or discounted product or service for using a particular credit card network, low-cost card within that network or other form of payment;
- Express a preference for the use of a particular credit card network, low-cost card within that network or other form of payment;
- Promote a particular credit card network, low-cost card within that network or other form of payment through posted information or other communications to consumers; and
- Communicate to consumers the cost incurred by the merchant when a consumer uses a particular credit card network, type of card within that network, or other form of payment.
So what does this really mean for consumers? We don’t know yet, but I see a number of possible outcomes:
Lower Prices at the Cash Register
Merchants have long maintained that interchange fees are a “hidden tax” on consumers, and that if they were lower, they could pass along the savings by lowering prices. Of course, the savings could also be used to bolster balance sheets and increase shareholder value. However, it is possible you’ll start seeing promotions, discounts or rewards from merchants who want to encourage consumers to use particular cards.
I am not getting too worked up over this yet. The reason businesses accept cards in the first place is that they want to make sure as many customers as possible can buy their products and services. That won’t change. And pinpointing certain cards for discounts may not be as easy as it sounds. As a paper by the Kansas City Fed pointed out, “In reality, merchants do not know their own fee level of a particular transaction due to the complex interchange/merchant fee structures.”
Merchants will have to walk a fine line between encouraging the behavior they want from customers without driving away business.
Higher Rates and Fees
The industry has warned that lower interchange will result in higher costs to consumers. That, too, remains to be seen. In a report for the Minneapolis Fed, James M. Lyon noted that after interchange fees were lowered in other countries, some consumers experienced higher annual fees (in Australia and Spain), shorter grace periods and less generous rewards programs (in Australia). He also noted, though, that when interchange fees were lowered in the U.K. “both annual fees and introductory rates remain relatively low.”
This one does concern me. Keep in mind that this action is coming on top of the CARD Act, and on the heels of the so-called Durbin Amendment that will lower interchange fees on debit cards. Card issuers and the card companies have already seen some of their most lucrative revenue streams slow down or dry up, so it’s not a stretch to imagine this will put further pressure on them to come up with other ways to make up for that lost income.
Reduced Rewards Programs
Convenience users, those who pay their bills in full each month, are largely subsidized by interchange revenue, a portion of makes its way back to card issuers. That’s why card issuers try so hard to get their customers to use their cards often. More purchases mean more interchange revenue. So it’s not a stretch to conclude that lower interchange revenue could make these cards less profitable, and possibly less attractive to card issuers, which in turn could mean higher fees. Keep in mind that issuers are not allowed to charge inactivity fees – including annual fees for consumers who don’t reach a certain spending threshold. So issuers will have to either focus on incentives that drive volume larger for these cards, or consider other pricing structures.
Wider Acceptance
When I shop at Sam’s Club, I have to either used a PIN based debit card, cash or a Discover Card. Could this change mean wider acceptance among discount clubs like Sam’s – or smaller retailers – who have shied away from accepting credit cards in the past? It’s conjecture on my part, but since I am speculating anyway, I might as well throw this possible outcome into the mix.
There is no question that something had to give here. Business owners have a legitimate reason to revel in this victory. But for consumers, whether this will ultimately prove to be a boon is less clear.
Photo credit: iStockphoto
Gerri Detweiler – Personal finance author and Credit Advisor for Credit.com, Gerri contributes budgeting, debt recovery and savings information online. She is also the co-author of Debt Collection Answers: How to Use Debt Collection Laws to Protect Your Rights.
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