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The Credit Con: Credit Card Companies Get Creative in Circumventing New Legislation

Steve Puma | Tuesday December 1st, 2009 | 4 Comments

C4CCsqr.jpgPrior to the crash of the housing bubble and the collapse of financial markets, many different types of companies we involved in creating new and interesting ways to separate Americans (“consumers”) from their hard-earned money, especially those companies involved in consumer finance. From cell phone carriers to banks, high interest rates and hidden fees were the name of the game, leaving customers too confused to sort it all out, with many simply giving up and paying whatever they were charged.

The worst offenders, credit card companies and banks, have recently found themselves on the wrong end of legislation, the CARD Act of 2009, is intended to put a stop to some of the worst practices, such as excessive interest rate increases and unfair fee traps. True to form, this has not stopped the credit card companies from attempting to extract as much money from their customers as possible. According to Consumers for Competitive Choice, “…rather than react responsibly, the credit card industry has flouted the will of Congress and the Administration by moving quickly to raise rates, increase fees, and reduce available credit before the law takes effect next year.” In a completely new tactic, the credit card companies have decided to shift their focus to credit card transaction fees, an area that Congress has not yet addressed, and something that Consumers for Competitive Choice representatives feel we should all be very concerned about.

Headquartered in Indianapolis, Ind., Consumers for Competitive Choice, (C4CC) is a national alliance of consumer advocacy groups and private citizens who are committed to promoting maximum choice for consumers in communications, energy, health care and financial services. The organization has spun off a new project, called the Credit Card Con, to bring attention to the issue of credit card interchange fees. Last week, the company held a teleconference to bring attention to the recently released report by the General Accounting Office (GAO) on the matter.

According to a recent expose hosted on the PBS show Frontline and sponsored by the New York Times called The Card Game,

In the U.S., merchants pay 1.8 percent of every credit or debit card transaction to have the payment cleared. Last year, interchange fees cost them roughly $35 billion, according to The Nilson Report, a newsletter that tracks card payments. It’s the second-highest expense for many businesses, after labor costs, and some merchants say that the fees hurt, especially when they’re struggling to survive the recession.

Currently, consumers do not notice the effect of interchange fees on retail prices, since most credit card companies, such as Visa and MasterCard, restrict their vendors from charging lower prices for customers paying with cash, afraid that more people would use cash if they realized that it was actually cheaper. In addition, these same credit card companies restrict retailers from refusing their higher-fee cards, and limit their ability to negotiate fees by negotiating together with other merchants.

According to the The Card Game website,

One of the problems with interchange fees, say merchants, is that the rates vary depending on the type of card used in the transaction, making it very difficult for businesses to know what they’ll end up paying at the point of sale. Debit cards have cheaper interchange fees than credit cards. Rewards cards have the most expensive fees.

Another problem, say critics, is that unless you’re an industry insider, it’s almost impossible to figure out how they come up with the interchange rates, how much money is being made, and where it all goes.

The collusion amongst credit card companies is massive, and the current anti-trust lawsuit is “the largest private antitrust litigation in U.S. history.”

The GAO Report outlines several methods for reining in interchange fees, including allowing retailers to band together to create leverage when negotiating fees, putting a cap on fees, disclosing fees to consumers, and allowing merchants to refuse higher-cost cards.

Although regulating interchange fees would seem like a good thing, it could possibly cause consumer prices to actually go up, as happened in a few cases in Australia. While a few card companies cut their interchange fees in advance of government regulation, their annual fees went up, grace periods went down and the cost of using frequent flier miles went up. And even though their costs went down, some retailers went so far as to charge their customers a surcharge for using credit cards, in an attempt to recoup the remainder of the interchange fees.

So, what does this all mean, from a sustainability perspective? While I believe that regulating the credit industry is necessary to protect consumers from excessive fees, it appears that even with government intervention, using credit cards will continue to be a costly exercise for most people.

It is hard for me to see this as a bad thing, though. Access to easy credit along with massive overspending is what has led a large number of people into financial ruin. This is partly due to the fact that there have been little or no incentives for individuals to save their money. Perhaps this will be a reason for people to start saving their money, so that they will use cash or debit cards before they buy something. Hopefully, this could bring us back to a time where people will give more thought to what they buy and how they spend, and perhaps be one more small step towards a culture that doesn’t consume quite as much.

What do you think? Should credit card interchange fees be regulated? Tell us what you think in the comments.


Resources

The Card Game: Seven Things You Need to Know (PBS.org)

Fact Sheet: Reforms to Protect American Credit Card Holders (WhiteHouse.gov)

Survey Shows Many Consumers Are Unaware Of Gift Card Fees (Dow Jones)

Credit Cards Still Use Soon-To-Be Banned Policies (AP)

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Steve Puma is a sustainability and technology consultant. He currently writes for 3p as well as on his personal blog, ThePumaBlog.com, about the intersection of sustainability, technology, innovation, and the future. Steve holds an MBA in Sustainable Management from the Presidio School of Management and a BA in Computer Science from Rutgers University. You can contact Steve through email or LinkedIn, or follow him on twitter.


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  • lauriesanford

    This is horribly depressing! Ugh. Thanks for the info tho

  • lauriesanford

    Argggh!!! This is horribly depressing and frustrating! Important to know tho. Thanks for the info

  • julianngrant

    The bigger problem is our dependence on credit and using plastic, cash is king. I've been trying to decrease my dependence on using cards all together. All the processing fees, from ATMs, paypal, ebay, everyone is getting a piece of the money flowing through the pipe. It definitely chips away at profits for small businesses. After reading your post, it's starting to sound more like a house of cards – and it could come tumbling down.

    I'm not a fan of regulation, there's too much of it going on already. But being a customer of the banking/financial industry I can say that their interests are not always focused on their customers well being, but instead encourage spending that most people cannot afford anyway. And if you are ever on the side of being in collections, you see the underbellies of these organizations and it's not pretty. So, I don't know if regulation is the answer here, but the industry is so big with massive implications that it would almost necessitate some sort of managed intervention. If we (consumers) have to pay more for purchases later, then we have the opportunity to avoid that by paying cash. That would certainly get their attention.

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