The interchange win

By Felix Salmon
June 21, 2010
looks like interchange-fee regulation has made it through! That's great news, and I'm not particularly concerned about the compromises that Dick Durbin made. The Fed can now consider fraud costs as well as transaction costs in setting the level of interchange fees -- that's OK, although it'll probably just push further down the road the day when the US will finally embrace the low-fraud EMV standard.

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It looks like interchange-fee regulation has made it through! That’s great news, and I’m not particularly concerned about the compromises that Dick Durbin made. The Fed can now consider fraud costs as well as transaction costs in setting the level of interchange fees — that’s OK, although it’ll probably just push further down the road the day when the U.S. will finally embrace the low-fraud EMV standard.

Kevin Drum “wouldn’t mind seeing some regulation of credit card interchange fees as well”, but that’s bound to happen, de facto, now that merchants are free to offer discounts to people paying with cash or debit: if credit-card interchange fees stay high while debit-card fees fall, then merchants will simply start offering broad discounts to anybody using cash or debit, essentially forcing customers to pay extra for all those frequent-flier miles and cash rebates.

The one place this might end up hurting consumers is in the travel area generally, and plane tickets in particular. I feel that we’re bound to move to a Europe-style state of affairs where it costs a significant extra sum to buy tickets on a credit card, and that as a result a lot of people will use debit cards instead. When they do so, they’ll lose a lot of consumer protections in the event that their airline goes out of business or otherwise fails to honor the ticket they’ve paid for.

Still, it always was a bit weird that we got these protections for “free”. I guess that going forwards it’s just going to be a lot more obvious how much they really cost. And that a lot of people, if they’re buying some kind of service to be delivered in the future, are going to quite deliberately use their credit card, even if they have the money in their checking account to use their debit card.

I think too that if discounts-for-debit catch on, that’ll have a positive effect in terms of minimizing the degree to which people delude themselves that if they buy this item today, they’ll be able to pay it off in full before the monthly credit-card statement is due. Mike Konczal sees

something unhealthy about a payment system that blurs the line, on purpose, between transactions and revolving lines of credit. The system is set-up to encourage you to use credit as much as possible, and then pay that credit off later. This is not an accident. The common phrase among credit card company people is that people are “sloppy payers”, and these sloppy payments function as a major profit center for businesses. This system also transfer money upwards in a regressive, tax-free manner and distorts prices so that shareholders of financial companies can get a cut.

The new interchange rules will definitely put a dampener on this kind of activity, although they won’t eliminate it entirely. If you want to use a credit card, that’s fine, but you’re going to have to want to use your credit card, and the distinction between credit cards and debit cards is going to me much more obvious. That’s got to be a good thing in terms of improving personal finances across the nation.

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