July 12, 2009With the release of credit card bill, credit card holders can now expect at least some semblance of fairness from their credit companies. Merchants and other businesses do not have such luxury, however.
For merchants and other businesses, accepting credit card payments from customers can be a financial pain. Every time a customer uses his or her credit card to pay for a purchase, the credit company issuing the credit card will charge the merchant a percentage of the purchase. The fee, known in the industry as “interchange fees”, ranges between 2% to 5 %. When credit cards were relatively new, the purpose of interchange fees was to pay for the administrative expenses a credit company incurs for processing a payment via credit company. However, modern technology have drastically lowered the cost of credit card payment processing. Credit card companies still continue charging interchange fees, though and, according to figures, since the year 2001, the revenues that credit companies see from interchange fees have risen up to 120%.
Complaints against the unfairness of interchange fees are usually met with the explanation that the fees are essential for covering the cost and the risks of credit card transactions. According to them, these have grown significantly through the years. Critics are, however unimpressed, saying that it is the credit companies who have increased these themselves by proliferating credit cards to consumers.
Merchants are currently fighting back against the credit card companies over the issue of interchange fees. The current system is very much tilted towards the credit companies. They set the interchange fees unilaterally and the fees are not issued at a flat rate so that interchange fees can be higher for more prestigious types of credit cards.
The merchants currently have the Credit Card Fair Fee Act in the works at Congress. The Senate version gives merchants the power to negotiate the interchange fees with the credit companies. Disagreements are to be settled by an independent, three person arbitration panel. The bill would also require credit companies to provide better transparency measures for transactions with merchants. The House version of the bill is basically the same.
Credit companies are actively fighting the Credit Card Fair Fee Act. They are lobbying against the passage of the bill and are running several advertisements which basically say that merchants ought to pay their share. Merchants are arguing that they are already paying their share and have had to pass on the costs to consumers because of the high cost of that share. Credit companies are countering that, should they lower their interchange fees, merchants may pocket the money and not pass on the savings to the consumers. At the end of the day, it is the consumers who get hit worst.
The biggest problem for credit card companies right now are unpaid debts. A Nilson report from April 2009 puts outstanding credit card debt at $972 billion by the end of 2008, just a few digits away from hitting a trillion dollars. The report also states that about 15% of American consumers had been late in making their credit card payments and 8% had not paid their debts at all. The resulting rise in toxic assets and write offs ultimately caused the current credit crunch.
The slow down in loan losses and rate of overdue loans may be because of the tax refunds American consumers usually get during the first quarter of the year. Traditionally, consumers used these refunds to pay off credit card and loan debts which is why most credit companies expect higher earnings during that time. However, David Nelms, Chief Executive Officer of Discover said that the improvements on the rate of delinquencies may not be just seasonal.
Because of the profitability of small businesses, credit card companies had solicited their services aggressively to small businesses. Quite a few credit companies started issuing credit cards instead of loans to small businesses. As a result, credit card payments became the preferred, if not required, payment method among vendors. The growth of the market was strong enough that a few companies began to focus exclusively on credit cards for small businesses. One such company was Advanta. Founded in 2001, the company saw its profits surge. In 2006, it posted 54% more profits compared to profits from the previous year. Advanta eventually saw more than a million small businesses subscribed to their credit cards.
While addressing many unfair credit industry practices such as unfairly high interest rates and fees and obfuscated business practices, the credit car bill left out merchant’s pet credit industry peeve: interchange fees.
The legislations that Visa is referring to is the much heralded and highly controversial credit card bill which President Barack Obama recently signed into law. Among other things, the bill will take away the capabilities of credit companies to make arbitrary interest rate increases, it will block them from charging certain types of fees and it will put a limit on the penalties that credit companies give out which the government considers to be unfair.
The credit card industry found itself on the verge of collapse when, at the outset of the currently ongoing economic crisis, credit cardholders began defaulting on their credit card payments. The industry found itself especially vulnerable because, for the past few years, they had been profiting mainly from credit cardholders who could reliably pay off the penalty fees, not the their debts. The credit card industry had found these types of borrowers to be virtual goldmines as they continued to pay the credit card companies without really seeing any substantial decrease in their debts. The profits the credit card companies took from these types of borrowers have not been publicly released but experts estimate the value to be quite staggering.