Doctor of Credit writes that EU lawmakers agreed to impose limits on EU debit and credit card interchange fees of 0.2% and 0.3% respectively.
The Effect of Debit Card Fee Limits in the U.S.
Debit interchange is already limited in the US by the Durbin Amendment to Dodd Frank (which led, more or less, to the end of rewards debit cards though I’m grateful that my Suntrust Delta debit card is grandfathered – for now).
Of course it wasn’t just the end of rewards debit cards that happened as a result of the Durbin Amendment. Banks no longer earn much off of debit cards, which means that the average checking account customer is no longer profitable, there has to be another non-checking relationship there. So it becomes more difficult to get free or fee-waived checking accounts. You price a whole lot of people out of the banking system, and push them to check cashing places.
But there are ‘loopholes’ in the rule, and Amex is able to put out a product (initially, Bluebird) that circumvents debit interchange limits and allows them to create what are effectively online bank accounts for the very market segment which was increasingly unbanked as a result of the Durbin Amendment.
Lots of second and third order consequences to these rules, both good and bad, that may not be initially obvious.
Credit Card Fee Limits in Europe
Credit card interchange fees — which can often run 1.8% – 5% — would take a major hit in Europe. A cap of 0.3% would likely limit the issuance of cards, in a market where cash is already far more common than in the U.S.
American Express, Diners Club, and business cards are exempt from the cap. Exemptions last for at least three years.
Credit Cards Provide Valuable Benefits to Merchants
While merchants want to be able to accept credit cards while not having to pay to do so, it’s worth nothing that credit cards are a really great benefit and value-creator in ways we often take for granted.
- They’re far more convenient than cash
- They limit the ability for employees to steal, compared to cash, so offer real savings to merchants
- Payments happen electronically, no more warehousing cash and taking it to the bank. This not only saves time it also prevents theft (robbery).
- Eliminates risk to the merchant of bad checks. Merchants can of course pay to insure their checks, but that too comes at a cost. That means retailers don’t have to worry about collecting the money in the event a customer passes a check from an account with insufficient funds.
- Credit cards foster online transactions.
And of course plenty of studies have shown that people spend more on credit cards than they do when paying by cash. Why shouldn’t card companies get paid for this? Despite legal cases claiming monopoly, we have not only Visa and MasterCard networks but also American Express and Discover (and internationally Diners Club still processes through its own network rather than via MasterCard as in the US).
Tinkering is Irresistible and Neverending
Forget chip and pin, credit cards generally could become less common as the benefit to card providers in issuing them shrinks substantially in Europe. And then merchants may become less likely to take them even at a lower cost, to the extent that fewer customers have them. Although no doubt this will vary by type of establishment.
One regulation is rarely enough. Australia allowed merchants to charge consumers to use their credit cards, but is now considering limiting those charges.
Credit cards are a pretty amazing market innovation. They go a long way towards enabling the shift from personal to impersonal exchange which is an underpinning of development. The urge to tweak it, though, is pretty irresistible isn’t it? At the very least, if these rules are in fact implemented, our European friends will lose their rewards cards.