Editor’s note: This column ran in the March 7 edition of The Pulse, a weekly BankBeat email sent to subscribers which also includes top stories from the previous week.
Earlier in my life I was an all-cash guy, but now I am an all-plastic guy. Credit cards have evolved into a handy way to pay for things and I hope it stays that way.
While I remember decades ago that some retailers offered a slightly discounted cash price, today almost no retailer offers a different price to cash-paying customers than to customers using a credit card. That means the cash-paying customer is subsidizing the credit card buyer since the retailer ultimately gets more money from the cash buyer than from the credit card buyer after the interchange fee.
But I forgot about the disparity when credit card companies started offering reward points, travel perks and even airplane tickets in exchange for using a card. Rather than complain about the lack of a discounted cash price, it was easier to just take a free trip to Phoenix and forget it. (In January, I was able to secure air travel to an industry meeting in Arizona entirely by credit card points.)
Sen. Dick Durbin, the guy who took the fun out of debit cards, is advocating for legislation that will reduce the interchange rate on credit cards, which means there is unlikely to be sufficient margin in transaction interchange to fund leading-edge security, let alone reward or loyalty programs. Advocates for the Credit Card Competition Act say by lowering costs the law will help consumers.
The theory is retailers will pass along any savings they realize in reduced interchange fees. But we know from more than a decade of history since the Durbin amendment became law that savings resulting from lower prices on debit transactions were rarely passed along to consumers. In fact, the fees on some low-dollar transactions actually went up and no one saved any money at all. Banks mostly made up for lost revenue by offering fewer low- or no-fee accounts and by raising minimum balances on certain accounts.