New York Magazine grabs attention on the longstanding “honor all cards” issue with an eye-catching title: Are Other People’s Credit-Card Rewards Costing You Money? The essential question is one that has been in the courts and media for years: Should merchants be required to accept all payment cards even if the cards carry different interchange rates?
The article puts Amazon, Home Depot, and Target at the center off the issue.
- Amazon and Target have a surprising argument to make: The proliferation of rewards-rich credit cards is bad for consumers.
- And here’s the part that drives Amazon, Target, Home Depot, and that coalition of retailers crazy: If they want to accept any Visa card, Visa imposes an “accept all cards” rule, requiring them to accept low-fee and high-fee cards alike. The same goes for Mastercard.
- They are suing for the right to pick and choose which Visa and Mastercards they accept. They want to be able to reject the richest rewards cards – cards like Chase Sapphire Reserve, which offer generous cash back, points, and other perks, and which come with the highest transaction fees charged to merchants. They say, if they obtain this right, they’ll be able to charge lower prices to shoppers.
Correctly, the article cites differences in the interchange pricing tables for Mastercard and Visa.
- Did you know a merchant pays different fees to accept different classes of the same type of credit card? If your Visa card says “Signature” under the logo, merchants are paying a few extra tenths of a percentage point of your purchase price for the privilege of accepting your card, compared to a lower-tier Visa.
And suggests that the issue should be decided in the court system.
- So, these retailers are suing. They want a federal court to declare that the “accept all cards” policy is anticompetitive, because it protects banks like Citibank and Chase from having to compete to offer merchants lower interchange fees on the Visa and Mastercard cards they issue.
There is a discussion about the Australian Reserve Bank, which brought cost-accounting to the interchange topic in 2003.
- Philip Lowe, then an economist at the Reserve Bank of Australia and now its head, said he was “confident that these lower costs will flow through into lower prices for goods and services,” estimating they would lower consumer prices overall by 0.1 or 0.2 percent.
This is an issue that I have been personally following for 15 years, and I believe there has been no supporting evidence that consumers benefited. In fact, today Australian credit cards carry higher fees and lower perks than U.S. cards. Take a look at Commonwealth Bank, a top player.
There is no doubt the issue will drag on. The EU recently outlawed the “honor all cards” rule. Networks still require the practice in the U.S., which was instituted around the time that debit cards became popular. But remember, the U.S. market is the largest in the world, sans China.
Credit card rewards found their way into the U.S. financial system in the 1980’s when Citi partnered with American Airlines. Rewards evolved as the credit card industry grew by leaps and bounds. Consumers today have options that provide introductory bonus points, reward multipliers, cash back, and other perks. In the meanwhile, revolving debt in the U.S. grew from $56.2 billion in January 1980 to $1.01 trillion in August 2018. Even more significant is the fact that the most recent Federal Reserve study on non-cash payments indicates that credit and debit card usage in the U.S. was nearly $ 7 trillion made by over 100 billion transactions.
Rewards deserve at least partial credit for the payment industry growth.
With the influx of payments, merchants had to benefit somewhere!
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
