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Sep 05, 2023

America, it’s time to cap credit card fees

After moving to Ann Arbor from Britain, one thing I was particularly

After moving to Ann Arbor from Britain, one thing I was particularly discontented with was how many shops in America charge customers extra if they pay using a credit or debit card. For example, some liquor shops here in Ann Arbor charge as much as 3.5% extra if you pay using a card.

When you pay with a card at a store, card providers usually charge an interchange fee to your payment. The average interchange fee for credit cards in the U.S. is usually around 1.8%, which is often passed on to the consumer or absorbed by small businesses, highlighting the complex and costly nature of card payments in America. Upon talking to some of the shop owners here in Ann Arbor, it became clear that, for some small businesses, charging consumers extra is a necessary step to protect their profit margins.

Interchange fee caps already exist in America. The interchange fee for debit card payments, for instance, is capped at $0.22 per transaction. Yet, due to the almost identical popularity of credit cards and debit cards, this cap is not effective at protecting American consumers as, oftentimes, debit card users are charged the same extra fees as credit card users.

Digital payments in America don't have to be like this. In 2015, the European Parliament voted to cap credit card interchange fees at 0.3%. In 2020, a study showed that this cap saved consumers and merchants the equivalent of $2.2 billion a year, given that many EU member states already had similar caps.

Where do the interchange fees go? Besides lining the pockets of bankers, they are used to fund various reward programs. For example, the Bank of America credit card I currently have gives me 2.6% cash back on almost any purchase I make. There are also fancier reward programs that might be offered, such as free or subsidized first-class flights. However, there are a few questions to consider.

First, who is ultimately paying for rewards programs? While businesses might absorb some of the extra costs of card payments, consumers are ultimately paying for the majority of the rewards programs, since they pay a big share of the interchange fees. Diving a little deeper, only some credit card users are enjoying the rewards, since reward programs are only available for some of the credit card options, and oftentimes target people who just made the switch from a different company. In fact, there is an entire subreddit to discuss the best deals possible for every kind of purchase. Those who do not or cannot care about their cards — quite possibly older people or people struggling to gain information access — are thereby subsidizing those who find the great deals.

Second, rewards programs also reduce competition in the credit card industry. Credit card companies can discourage users from switching or exploring other credit card options by offering a substantial reward for spending a significant amount of money using their card. If I was using a credit card from a provider with poor benefits and services, but could continue to use it for another three months and earn a free vacation, I would likely stick with it.

Lastly, this redistribution of money from interchange fees to rewards is meaningless. The redistribution does not generate anything new, yet it makes so many people, from bankers to consumers, spend so much time. It makes you spend hours, if not days, to get a new card just so a share of your money can get back into your pocket (or maybe the bankers will dictate what you can do with that money, such as a festival ticket that you do not need).

America has tried to reduce interchange fees in the past, but efforts were unsuccessful. In 2008, the Credit Card Fair Fee Act was introduced to Congress. The act tried to allow retailers to negotiate interchange fees, which are controlled by large banks and credit card companies, to reduce the financial burden on small businesses and promote a fairer market. Last year, the Credit Card Competition Act was introduced in Congress. The bill tried to increase competition in the credit card industry to lower interchange fees, an approach that is a lot more moderate compared to the European one. However, both bills failed to proceed in Congress.

In addition to capping credit card interchange fees, we could also go a step further. In 2018, the U.K. banned businesses from charging extra fees for any type of card payment. This effectively eliminated the American liquor shop experience in Britain. The U.K. Treasury estimated in 2015 that this measure would save U.K. consumers the equivalent of about $205 million. There are also other benefits: This legislation has pushed the U.K. to become a nearly cashless society. In 2020, the survey indicates that 20% more U.K. respondents claimed to prefer paying without cash compared to their U.S. counterparts.

Digitized payments, made possible by fee caps, would make it easier for tax collections, as shown in a study done by the Deutsche Bundesbank, the central bank of Germany. It would also increase the difficulty of money laundering, according to a study from the Wolfsberg Group of International Financial Institutions.

Capping credit card interchange fees would make payments and banking significantly less expensive and complicated for all American consumers. It would also help America catch up with other countries in transitioning to a more cashless society, reaping the benefits of increased efficiency, reduced crime and enhanced tax compliance.

Ezra Tao is an opinion columnist. He writes about global politics, culture and international relations. He has too many hometowns to list here. He can be reached at [email protected]

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