Cap­ping credit card fees puts cap on benefits to Cana­di­ans

National Post (Latest Edition) - - FP COMMENT - Ju­lian Mor­ris I an Lee and Ju­lian Mor­ris is vice- pres­i­dent of re­search at Rea­son Foun­da­tion and a se­nior scholar at the In­ter­na­tional Cen­ter for Law and Eco­nom­ics. Ian Lee is as­so­ciate pro­fes­sor of strate­gic man­age­ment and in­ter­na­tional busi­ness at Sprot

Credit cards are owned by nearly 90 per cent of Cana­di­ans and are used in ap­prox­i­mately 65 per cent of point-of-sale pay­ments. How­ever, large mer­chants want gov­ern­ment to im­pose price caps on the trans­ac­tion fees that en­able card is­suers to in­cent credit card use. Such price- fix­ing would likely harm con­sumers.

Since 2008, the value of re­tail trans­ac­tions in­volv­ing credit cards has risen by over 50 per cent due to their con­ve­nience, se­cu­rity, in­sur­ance, war­ranties on pur­chases and, ar­guably the big­gest driver, the re­wards that cards offer. Own­ers of re­ward cards — about 80 per cent of Cana­di­ans with credit cards have at least one — cite re­wards as the pri­mary mo­ti­va­tor.

Credit card benefits are paid through a com­bi­na­tion of an­nual fees charged to card­hold­ers and trans­ac­tion fees charged to mer­chants. Al­though cards with more benefits at­tract higher an­nual fees, con­sumers rec­og­nize the bar­gain. A new Mac­don­ald Lau­rier In­sti­tute study found that those earn­ing $ 40,000 might ex­pect an­nual re­wards val­ued at $450 while pay­ing just $75 in fees. Those earn­ing $90,000 would ben­e­fit by about $1,350 while pay­ing $225.

Con­trary to claims that re­wards have in­duced spend­ing that in­creased credit card debt, a Bank of Canada study shows in­creased card use over the past decade has come mainly from “con­ve­nience users” who pay off their cards monthly and rep­re­sent a ma­jor­ity of card hold­ers.

Some mer­chants ob­ject to the higher fees needed to cover the cost of higher re­wards, claim­ing de­clin­ing prof­itabil­ity, and want the gov­ern­ment to im­pose price caps. Yet Stats Can data show that their prof­itabil­ity did not de­cline as a re­sult, and that the num­ber of mer­chants who ac­cept credit cards has in­creased in the past decade.

In Aus­tralia, the coun­try with the long­est- run­ning ex­per­i­ment with price caps, we found that, as with other price con­trols, price caps tend to re­duce the sup­ply of the price- capped good and cause other prices to rise. Aus­tralia’s price caps low­ered the fees paid by mer­chants by 43 per cent on av­er­age but raised the an­nual fees on credit cards by an av­er­age of 40 per cent. The ef­fect? Re­ward earn­ings from com­pa­ra­ble cards fell by an av­er­age of one third.

If that ex­per­i­ment was run in Canada, we es­ti­mate that Cana­di­ans would be worse off, with mid­dle- class house­holds bear­ing much of the pain. For an in­di­vid­ual or house­hold earn­ing $40,000, the net loss would be $66 to $ 187. For an in­di­vid­ual or house­hold earn­ing $90,000, the net loss would be $199 to $562.

We also es­ti­mate that mer­chants would ex­pe­ri­ence an ag­gre­gate net loss of be­tween $ 1.6 bil­lion and $ 2.8 bil­lion ( tak­ing into ac­count mer­chant sav­ings from lower fees). And we es­ti­mate that re­duced spend­ing and saving could cause GDP to fall by be­tween 0.12 per cent and 0.19 per cent per year, while fed­eral gov­ern­ment rev­enue could fall by be­tween 0.14 per cent and 0.40 per cent.

Mid­dle- class Cana­di­ans ben­e­fit enor­mously from credit cards and as­so­ci­ated re­wards. Were caps to be im­posed, the harm would be felt across the econ­omy.

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