All posts by Swaine

Public Protection & the Credit Card Industry

Expanding the field of progressive ideas is never easy. We are a mixed bunch with many causes and sometimes it can be tough to figure out which ones are worth going for. Here is one suggestion.

I am working with a group called the Merchants Payments Coalition, a collection of retailers from restaurants, convenience stores, grocery stores. They don’t have a lot in common — their markets are diverse and sometimes competitive, but one thing they agree on happens to be something U.S. PIRG and other progressive groups have been talking about.

The issue is Interchange Fees, a very complex (this is on purpose) fee imposed by the banks that issue credit cards for MasterCard and Visa. The fee is charged directly to merchants — so their interest should come as no surprise — but it is important to remember that ultimately this fee gets passed along to consumers in the form of higher prices on all products.

So what’s the big deal about that? Fees are a part of life, just part of doing business, right? Not in a market that is essentially a duopoly. Visa and MasterCard together control 80% of the U.S. credit card market, and the banks that issue their cards are usually the same banks (JP Morgan Chase) so they wield monopolistic control of the market.

There is also no way to avoid this fee. You can pretty much avoid any credit card fee if you don’t use credit cards — but not this one. One of their tricks is that any merchant who accepts credit cards cannot offer consumers a cash discount. Studies show that only 14% of the money collected from interchange fees is needed to cover the cost of processing credit card transactions. This means that a whopping 86% of the fee is extra profit for the card companies, or even worse, helps fund reward programs for high-income credit card owners.

Every time a low-income consumer purchases something with cash at a store that accepts credit cards, they are subsidizing plush reward programs for wealthy credit card users. It is essentially a reverse Robin Hood wealth transfer, from the poorest members of society to the wealthiest, and it is being encouraged by the card companies, who continue to offer even greater reward programs. A low-income consumer with a poor credit history is not allowed to enjoy the benefits of these reward programs, yet their hard-earned money helps fund them.

Now that we have a Democratic Congress, the use of committees is very important, and one we should put our stamp on is the Banking Committee. Chris Dodd has already started hearings on hidden credit card fees and predatory lending. Warren Reports at TPM Café followed that on the week it happened, and there is another diary on this subject at My Left Nutmeg.

What we need are more hearings to put further pressure on the credit card industry. Dodd is off to a good start, but we need more action. A major problem is that the interchange fee schedules and agreements are kept secret by Visa and MasterCard. First and foremost this is a matter of transparency — and the lack of it is hurting people’s pocketbooks. It doesn’t cost you much with each purchase you make, but it adds up fast. In fact, it’s the single biggest fee the card issuing banks collect, costing consumers $30 Billion dollars last year alone.

I encourage members of Calitics to help us put pressure on the credit card companies in order to convince them to provide more transparency and lower these inflationary fees.

Note of disclosure: I am writing this with input from others who are working with me to help raise awareness of this issue, so you may find a similar version of this diary on other progressive blogs. This is an important issue, so we will be around to follow up.