Payment Cards: Senate vote may move costs from charges to fees

Across the USA, the charges levied as a percentage of sales generate profits for card issuers of more than USD15,000 million. That money, retailers and consumers say, comes straight out of their pockets.

Financial institutions like debit cards, even though the "interchange rate" is generally slightly lower than for credit cards. The simple reason the consumers have been encouraged to switch to plastic and away from cheques is that it's cheaper for the banks to process a card payment than to handle a cheque.

More, cheques are documents and therefore subject to record keeping requirements: an EFPOS payment does not require paper storage (or if it does, it's a much smaller piece of paper and when it comes to storage costs, size matters.

Many "free" bank accounts come with debit cards as part of the package while credit cards are often charged for, sometimes in obscure ways that some consider ambush billing. Some banks levy an annual fee - but waive it if a customer can be bothered to go into the bank, produce their card and ask for the fee to be cancelled i.e. reversed off their account.

The plan is for the fee to be cut by approximately two thirds. That's a USD10,000 million hit on the industry's income.

And as a result, the issuers, mostly banks, will be looking for ways to recoup that cost.

The most obvious is by charging a fee for current accounts or for the cards themselves. There is precedent: many banks charge for cheques as well as for processing them. The banks could charge a transaction charge to the customer's account - although that is likely to be seen as beyond the pale as a blatant finger to the Senate.

If flat rate fees charges are added, then sporadic users of cards will suffer and those who use their cards most will benefit. That will be a regressive form of charging - pensioners use their cards much less often than those who commute to work and buy food and drink during the working day.

And in any case, the consumer will see a benefit only if merchants reduce their costs. Will anyone really notice if a restaurant bill goes down by about USD2.50? probably not, especially in the USA with its incessant demand for substantial tips. So prices in many places will not fall.

Some major retailers may make a big splash that they are reducing prices and that for a short time that reduction will be shown on the bill: they can easily reprogram their POS systems to show that, as they do other forms of discount. But when the period of showing it wears out, prices are likely to drift back to pre-reduction levels. They always do: witness the UK's 2.5% reduction in VAT - prices had generally returned to pre-rebate levels and so when the rebate expired, prices in fact rose. Economists posted that as inflation.

So the consumer is not likely to see any long term benefit from the reduction in interchange fees, banks will be unable to quickly replace all the income they have lost. The only people who are likely to gain are the merchants who argued that they were suffering because interchange fees were too high.

The fees were too high: but such a drastic cut will not have the desired effect.