We started out trying to prevent the next financial crisis. We ended up arguing about credit card fees. What’s going on?
When consumers use credit cards, the card companies reduce the amount they pay to the merchant. This discount is called an intercharge fee. Different cards charge different amounts. Visa and Mastercard charge around 2%; Discover charges about 6%. American Express charges 8%.
With credit card transactions now totaling $1.3 trillion, banks make about $30 billion annually. This fee pays for frequent flier miles, cash-back programs, and other perks. Consumers get convenience, credit, and fraud protection. Merchants get guaranteed payment and access to a larger market. The issuing banks get a revenue source of moderate risk that’s stable and growing. What’s wrong with this picture?
The fees are complex: when you read about them, your eyes start to glaze over. Some people feel that the card companies are taking advantage of this. In 2003 Australia cut these fees. Consumers ended up paying higher annual fees and getting fewer rewards. There’s always a cost to Congressional price-setting.
But the larger issue is why this is part of financial reform. The banking system broke down two years ago and needs corrective legislation. It’s hard to see what credit cards have to do with that.
Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!
Follow me on Twitter @GlobalMarketUpd