Don’t cap card fees, says think tank
Regulating would harm consumers
Capping transaction fees paid by merchants or regulating credit card rules will harm consumers, says a new paper released by an Ottawa public policy think tank.
The Macdonald-Laurier Institute paper says there’s no evidence merchants would lower their prices if the fees they pay credit card companies were regulated or if they could charge customers a surcharge for using payment cards instead of cash.
The experience in the United States and Australia “suggests that price controls on interchange fees provide significant windfall cost reductions to merchants and significant cost increases to bank customers — with no evidence of any corresponding pass-through of merchant savings to consumers,” the paper says.
Claims by retailers and the New Democratic Party that limiting transaction fees, permitting surcharges, and restricting current rules that force merchants to accept all cards would benefit consumers and businesses are “simply false,” says the paper, co-authored by Ian Lee, a professor at Carleton University’s Sprott School of Business,
“The opposite is more nearly the case. There is little reason to believe that most stakeholders would benefit from such regulations, and every reason to believe that consumers would be harmed.”
In July, the Competition Tribunal dismissed a complaint from the federal Competition Bureau that credit card rules imposed by Visa and MasterCard were “restrictive and anti-competitive,” forcing merchants to accept costlier premium cards and preventing them from imposing surcharges.
Since higher banking costs fall disproportionately on the poor, the paper says, ‘interchange fee and payment network regulation have been distinctly regressive.’
Merchants pay credit card companies fees ranging from 1.5 per cent for basic cards to nearly three per cent for premium cards, which offer incentives, such as travel points, to customers.
The tribunal said the proper response to the Competition Bureau’s concerns was regulatory change by the government.
However, the federal government made no mention of the issue in last week’s consumer-friendly Speech from the Throne.
The think tank’s paper argues that credit and debit cards provide “enormous benefits” to both buyers and sellers that can be undermined by overzealous regulation. In jurisdictions where such regulation exists, it has produced “unintended and undesirable effects,” it says.
In the U.S., the regulation of transaction fees for debit cards prompted banks to significantly reduce the availability of free chequing accounts. In 2009, prior to the regulations, three-quarters of American banks offered free chequing. By the end of 2012, that had fallen to 39 per cent, the paper says.
As well, there’s no evidence that Australia’s cap on transaction frees, in place since 2003, has led to lower retail prices for consumers, it says.
“Australian consumers on average are unambiguously paying more and getting less as a result of the country’s interchange fee price controls and payment network regulation.”
Since higher banking costs fall disproportionately on the poor, the paper says, “interchange fee and payment network regulation have been distinctly regressive.”
While big box retailers have benefited from the enactment of such regulation, “it has actually resulted in a price increase for many small merchants,” the paper says.
It also says claims that restrictions on surcharging and the honour-all-cards rule harm merchants aren’t borne out by the facts.
Accepting all cards is an essential element of a balanced payment system, which confers as much benefit on merchants as it does on consumers, it says.