A Wall Street Journal item on interchange fees struck a nerve with small business owners. In the Jan. 5 Op-Ed, Todd J. Zywicki, a law professor at George Mason University, argued when merchant fees are capped, consumers end up footing the bill. He said that’s exactly what happened when Australian regulators imposed price controls on interchange fees in 2003: issuers increased annual fees on cards and reduced the generosity of their reward programs.
No surprise, this argument didn't carry much weight with merchants, who have borne the cost of a sharp rise in these fees. One reader wrote to the Journal that Zywicki’s Op-Ed “contains too many arguments that are either self-serving or self-contradictory. He says that credit cards are essentially a closed system, yet he also claims that the consumers now carry credit cards at little or no cost because of the fact that there are no annual fees. The reality, however, is that no-annual-fee cards are predatory, and highly profitable to the issuing banks—at a severe cost to the card-carrying consumers.”
A second reader wrote, “Since 2001 credit card companies have raised their interchange fees 300%. That's an enormous increase and one that can only be explained by the fact that just two companies, Visa and MasterCard, control fully 80% of the market... This is the only business expense I can't negotiate as a small business owner.”
A third wrote, “Mr. Zywicki states that the average interchange rate is under 2%. Unfortunately almost no one pays those teaser rates. The rate for rewards cards and business cards is more like 3.5%. Since most cards today are rewards cards, our small bakery paid well over 3.5% in total fees during our last year in business.”
A fourth wrote, “Banks today compete to gain cardholders by offering increasingly generous card rewards. These rewards are merely transfers from consumers to themselves in the form of higher retail prices, with the banks taking a substantial cut. This provides no real economic benefit. Merchants big and small have little or no ability to push back against higher fees and are forced to compensate by raising prices, resulting in an inefficient system harming American consumers and the wider U.S. economy.”