Highway Robbery

HIGHWAY ROBBERY....Credit card issuers have recently jacked up the transaction fees they charge merchants, and it's easy to understand why they had to do it. Check this out:

Credit card companies' profits from interchange fees rose 33% from 1990 to 2004, according to a September report by the Government Accountability Office.

But it's not all about snark here at the Washington Monthly. It's about forward looking solutions. So let me offer one. The basic problem is that merchants, by law, aren't allowed to charge more for credit card purchases than for cash purchases. This means that card issuers can keep jacking up hidden transaction fees with no worries that the higher charges will drive away business. The only way to lose business is if merchants simply stop taking credit cards at all, and card issuers know perfectly well that this just isn't a realistic option for most retail operations. So they keep jacking away.

So let's unleash the free market on these guys. If they refuse to accept caps on transaction fees, let's allow merchants to pass along the fees to their customers. This would cause more people to pay by cash and check, of course, but that's the price of freedom. How about it?

POSTSCRIPT: Transaction fees were originally designed to offset the actual cost of processing credit card transactions. But how high are those costs? Lower than they were in the pre-computer era, certainly, but how much lower? As the article notes, Britain and Australia recently analyzed actual processing costs and discovered that they amounted to about 0.7% — i.e., less than a penny per dollar.

And how high are the fees in the U.S.? Over 2% That's a lot of free money the card companies are ripping off from merchants.