Keith Bradsher’s NYT story on Australian credit-card fees kicks off with an eye-opening anecdote:

When Steve Franklin bought four plane tickets on Qantas last June, he faced an unexpected expense: a surcharge of 7.70 Australian dollars on each of the 136.70 dollar ($126) tickets — just for using his Visa credit card…

Now, as Congress debates how to rein in credit and debit card companies in the United States, Australia’s experience is being pointed to as an example of just how tricky that can be: for one thing, if regulators limit one fee or rate, banks are likely to find another way to keep revenue flowing.

It’s not until the very end of the 1,400-word article that Bradsher sees fit to inform us that “no one is suggesting outright surcharges for paying with a credit card in the United States” — and he never mentions that airline surcharges are a very special case, because of those holdback charges.

That said, if you start introducing legislation which decreases the amount of money that credit card companies get from hidden charges, it’s almost certain that you will increase the amount of transparent charges that credit-card companies will start imposing. And when people start seeing new charges, they use their cards less:

The main consumer federation in Australia, Choice, says that while regulations here have had a few unintended consequences, they have created incentives for retailers and consumers alike to rely more on debit cards, which have much lower processing costs, instead of credit cards.

That’s already happening in the US, and the trend will accelerate if new legislation gets introduced, and it’s a good trend to see accelerate — especially now that banks are being banned from imposing unasked-for overdraft fees on debit-card purchases. (Mike Konczal has a good post up today on the way that hidden fees can force invidious choices.)

Interchange fees on both debit cards and credit cards are rising, and in general it’s a bad thing when banks start making billions of dollars from hidden fees that very few people ever see. Much better to cap those fees and force the banks’ income sources out into the open where consumers can make their own decisions about whether and how they want to pay them. One consequence is likely to be that total credit-card indebtedness will fall. And we should all be happy about that.

Ezra Klein, on what he considers a vicious cycle in credit cards:

The problem is that the people who migrate toward debit cards are the people who have enough money not to need much credit and are responsible enough to not want it. The good risks, in other words. The people left in the credit card market will be disproportionately bad risks, which means rates will go up and standards will tighten, which will in turn drive more people out of the market, starting the cycle over again.

I’m not convinced that this is a bad thing. Credit cards are useful payment devices, but atrocious borrowing devices. (Steve Waldman has a great post explaining the distinction further.) We want to move to a world where people use charge cards for transactional purposes, and personal loans for credit purposes. The way we’re going to get there is, essentially, by taxing the stuff we want less of — and that means increasing the interest rates and annual fees on credit cards.

Sometimes this is going to happen in an underhand and less-than-honest way: Odysseas Papadimitriou has a great blog entry on how Bank of America is denying that introducing a $50 annual fee constitutes a repricing of its credit cards, for instance. But the big move, away from credit cards and towards alternate means of payment and sources of credit, is surely to be welcomed.

The sad aspect to all this is that millions of people hold large credit card balances and have no ability to refinance them with personal loans, or even any particular notion that such a thing might be possible. They’re going to be harmed by this move. But over time, if things go right, their numbers will naturally dwindle, and we’ll be left with a much healthier system of consumer finance.

Something smells very fishy to me about this chart in today’s WSJ:

How can fees be going down as a percentage of transactions if they’ve been rising sharply in nominal terms? The total amount of goods bought on plastic isn’t rising that fast. The WSJ doesn’t help answer the question, preferring instead a simple he-said she-said:

Debit cards carry lower interchange fees than credit cards, but fees on those cards are rising as debit cards become more popular.

Merchants in the U.S. paid an average interchange rate of 1.82% per transaction last year, down from 1.93% in 2005, according to the Nilson Report, bolstering the industry’s argument that fees are falling.

Huh? In once sentence we’re told that fees are rising, while in the next we’re told that fees are falling. Not helpful, WSJ.

The answer, I think, is that the second chart is rather misleading. Consider a world where:

• Credit-card fees are higher than debit-card fees, and are rising.
• Debit card fees are also rising.
• Debit card usage is rising, while some things which used to be bought on credit cards are now bought on debit cards.

I suspect this is exactly what we’re seeing in the chart above. The “falling fees” chart is really just a chart showing that people are moving from credit cards to debit cards. (And remember that debit cards don’t come with cash-back rebates, or loyalty miles, or anything like the amount of purchaser protection that credit cards offer, all of which things are paid for by interchange fees.) Fees are rising across the board, but the secular move into the world of debit cards, which were all but nonexistent a few years ago, allows the industry to claim that fees overall are falling.

I’m waiting to hear from David Robertson of Nilson Report, and I hope he’ll be able to give me some more figures on all this. But my gut feeling is that the second of the WSJ’s charts obscures much more than it reveals.

Yesterday’s news about the drop in consumer credit made sense to me: if people are saving more, that means they’re likely to be paying down their debts. But one thing jumped out at me in the official statistical release: it had figures going back to 2004 for credit-card interest rates, and the latest numbers are the highest of the lot.

The release doesn’t have intra-year data, though, so I looked back at the historical data. It turns out that credit card interest rates, for people assessed interest, hit a low of 11.96% in February 2003; they then rose slowly to a high of 15.24% in August 2007. After that, they went back down: they were 13.36% in November 2008. But in the three quarters since then they’ve risen sharply, and are now back up to 14.90%.

I suspect that what’s going on here is partly that limited-time teaser rates are expiring, and consumers aren’t getting new credit-card offers into which they can roll over their debts; it’s surely also a function of card companies raising rates unilaterally while they’re still allowed to.

So what’s happening to credit-card interest payments? When revolving credit hit its peak, in the third quarter of 2008, there was $975.2 billion outstanding, with average credit-card interest rates at 11.94%. Multiply the two, and you get $116.4 billion: that’s not a real number for interest payments, since many people pay off their credit cards in full, but at least it allows for a back-of-the-envelope apples-to-apples comparison. Today, outstandings have fallen to $899.4 billion, but rates have risen to 13.71%: multiply those two, and you get $123.3 billion — it’s gone up, rather than down.

I hope that the rising credit-card interest rates, along with the positive savings rate and the fact that credit card balances can’t be paid off with low-cost home equity lines any more, mean that the current decline in credit-card balances continues for a long time to come. What’s more, once the new rules come in later this year, credit-card companies won’t be able to continue to simply decide to raise their interest rates any more. But if you needed another reason to pay down those credit cards, this is a good one: your rates have gone up sharply, and they almost certainly won’t come down any time soon.

John B just left me an interesting comment on the subject of credit cards:

Your statement on banks needing to focus on competing, rather than pages of agate type is correct. but is there a substantially large enough market of major credit card issuers to sustain true competition? I don’t think so. And probably not in a more regulated environment.

It’s a good question, so I used the data here to chart the share of the credit card market held by the biggest issuers. The percentages aren’t of the total market, just of the top 15 issuers, but it’s close enough:

It’s pretty clear from this chart that between them, the big credit card issuers absolutely have the ability to set prices. It’s also clear just by looking at their marketing materials that none of them is particularly interested in competing with the others by reducing the maximum interest rate that they charge.

In most contexts, a chart like the one above would I think bespeak a competitive market. But in credit cards, I’m not so sure. On the other hand, do we want credit cards to be highly competitive? I’m not sure that we do: what we really want is for credit cards to be transparent.

At the margin, if the card issuers bring down their interest rates, that will only result in even more people borrowing even more money on their credit cards. But doing so is nearly always the worst possible way of borrowing money, except for maybe going to the loan shark down the street. Ideally we want the whole credit-card market to shrink, and for banks to go back to offering personal loans.

Andrew Martin reports:

At Target, for example, interchange fees represent the second-largest store-level expense, behind payroll. The costs are similarly eye-popping at Home Depot, where officials say they top the price of health care insurance for employees. “The amount of money we’re spending on interchange would put 10 associates in each of our stores,” Dwaine Kimmet, vice president of financial services for Home Depot, said at a recent conference on credit card fees.

Martin is right that lower interchange fees might not mean lower prices for consumers. But they would improve value in other ways.

Alternatively, we can just let the market take care of things, as Floyd Norris proposes:

Make it clear that credit-card companies cannot force merchants to pass the fees on to their customers — This coffee is $1.50 if you pay cash, or $1.79 if you use plastic. If Visa will offer a better deal to the merchant than AmEx does, maybe a Visa purchase should be $1.69. A little price competition would be welcome.

There’s a good reason that sales taxes are lower in the US, where they’re visibly added on to posted prices, than they are in Europe, where they’re invisibly included in posted prices. Maybe the first thing we should do in the war against interchange fees is simply make them visible.

Juan Lagorio is right. The various proposed bills regulating interchange fees — the fees that merchants pay whenever a customer uses a credit card to pay for something — could definitely hurt Visa and Mastercard, despite the fact that Visa and Mastercard don’t actually charge those fees and claim that they would not be impacted by the legislation.

How do we know that Visa and Mastercard are worried? Well, for one thing, Shawn Miles, the head of global public policy at Mastercard, has written an essay arguing against them:

No matter how loudly the big box merchants claim the mantle of “Protector of Consumer Interests,” granting big box merchants a collusionary antitrust exemption will have the opposite effect: less credit availability, higher prices, and reduced choice for consumers.

Miles points to the precedent of Australia, which saw credit-card fees rise after the government mandated lower interchange fees. But the post hoc ergo propter hoc argument is weak: for-profit card companies will naturally raise fees as much as they can no matter how much or how little money they make on interchange. It’s the same mechanism driving penalty rates of interest. And indeed the base case in the US is for a slow yet inexorable rise in interchange fees: one purpose of this legislation is to try and put an end to interchange-fee inflation (up 14% last year to about $48 billion, averaging an eye-popping 1.75% of total purchases).

In Australia, by contrast, interchange fees are now about 0.5%, which means there’s a lot of room for current fees to fall. What’s more, as Adam Levitin points out, the bills currently being considered by Congress don’t go nearly as far as the Australians did: they don’t mandate a fall in interchange fees, but just allow merchants to get together on one side of the negotiating table, against the small and powerful card issuers on the other side. Mastercard’s Miles characterizes the bills as “interfering with competitive pricing”, but that’s not really the case at all: pricing right now is pretty much unilaterally set by the card issuers, and the bills would introduce a much-needed bit of pushback from merchants.

Would lower interchange fees mean lower prices for consumers? Probably not — I suspect that Miles is right when he says that the profits would largely go straight to retailers’ bottom lines. But there’s really no reason why card companies should take $48 billion a year out of retailers’ profits — especially not when small merchants are disproportionately hit, sometimes paying 4% or more of their credit-card revenue to the bank. (You think those reward cards are great for you? You’re right, but the merchant will probably pay a higher fee when a reward card is used than when a regular card is used. If you want your merchants to do well, maybe think twice about using those rewards cards.)

On the other hand, there’s no reason whatsoever to believe Miles when he says that credit availability will go down, that prices will rise, or that “choice for consumers”, whatever that’s supposed to mean, will be reduced. The main thing that will fall is the card issuers’ profits — and that’s by design.