Right now, Congress is considering legislation that will significantly increase consumers’ costs to use debit and credit cards. When the U.S. Senate debated the important financial regulatory reform bill last month, it added an unrelated amendment that would shift retail merchants’ fair share of the cost of the electronic payments system to consumers. There is still time to stop this amendment by letting Congress know it should not be part of the final legislation.
Under the current arrangement, each time a consumer uses a debit or credit card, a merchant is paid guaranteed funds immediately and does not have to handle cash or wait for a check to clear. As part of the transaction, the financial institution that issues the card receives an interchange payment from the merchant. The current interchange arrangement helps credit unions and community banks cover the financial risks associated with issuing the cards such as losses on unpaid balances, fraud losses, and data security. These are costs the merchants don’t have to worry about.
At credit unions, which are member-owned, not-for-profit financial cooperatives, the current interchange system not only allows for these convenient card services to be offered, but it also helps position credit unions to be able to offer better rates and lower fees on debit/credit card services that members need. Changes to the interchange process in the current version of the financial regulatory reform bill would significantly harm credit unions and would, therefore, significantly harm consumers who use debit/credit cards.
The interchange amendment that is now in the financial regulatory reform bill would put in place government price controls on the interchange rates that retail merchants pay. If the government sets the merchants’ interchange rate too low, it will be more expensive for consumers, because credit unions and community banks will be forced to pass along the existing costs of offering debit/credit cards directly to consumers through higher fees.
This amendment has been positioned by merchants as a consumer benefit, but that will not be the reality. There is no evidence that merchants’ savings would translate into lower costs for consumers, since the amendment does not require them to pass their savings on to consumers. Effectively, the merchants’ savings would become the consumers’ costs.
In addition to the government price control of the interchange rate, the amendment would allow merchants to discriminate against cards they don’t like. For example, a retail merchant might require a high minimum purchase amount if a consumer is using one kind of card rather than another or may offer discounts for the use of one kind of card rather than another. This will lead to consumer confusion over which types of cards they should carry in order to avoid minimum purchase amounts or higher prices.
Consumers need to contact their senators and U.S. representatives and urge them to oppose including the interchange amendment in the final financial regulatory reform bill.
The Indiana Credit Union League is located in Indianapolis and is the statewide trade association for credit unions in Indiana. Those credit unions serve more than 2 million Hoosiers.