The New York Times has a piece on some of the unintended consequences of Australia’s recent changes limiting interchange fees on credit card transactions. In response to merchants’ complaints of excessively high interchange rates, regulators in the US may soon be set to tackle a similar problem here in the states.
First, check out this interesting graphic from the article demonstrating the trend in Australia away from credit cards towards debit cards as a result of the legislation (source)
Credit Card Use in Australia Post-Regulation
The unintended consequences the article describes typically results in higher fees or fewer incentives for the consumers:
Since the government policies went into effect, Australian banks have cut credit card perks and shrunk rewards programs, like frequent-flier miles. While it used to take 12,400 Australian dollars of spending on Visa or MasterCard from one of the country’s four biggest banks to earn a 100 dollar shopping voucher, for instance, now it takes 17,000 dollars.
Banks now also require customers to pay their bills faster. Interest starts accumulating on many cards 33 or 44 days after the start of a billing period, instead of the previous 55 days.
Annual fees have also climbed for credit cards with reward programs, to 140 Australian dollars a year for gold cards that carry rewards, up from 98 dollars before regulation of interchange fees.
More disconcerting is that the new regulations allowed merchants to add credit card processing fee surcharges to credit card users – something that’s prohibited by nearly all processors here in the US. (While charging a surcharge on credit card processing fees is forbidden by merchant account agreements here, providing discounts on purchases made with cash or debit cards is legally protected by the Federal Truth in Lending Act.
Indeed, after the Australian central bank allowed companies to start levying surcharges, many began to impose large and rising ones on credit card use. Some companies have even figured out a way to make a profit. For instance, Accor, a global hotel giant with 11 brands ranging from the luxurious Sofitel chain to Motel 6, introduced a 1.5 percent fee here last February for credit card users.
“It has aided our profit margins,” said Michael Issenberg, Accor’s chairman of the Asia and Pacific region, who added that the hotel chain had seen little consumer resistance.
It’s too early to say what sort of reforms US legislators are planning on taking, but the Australian experience certainly provides a lot of insight into what some of the consequences could be of any interchange fee reform.
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