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- Title
Encouraging Surcharge: Toward a Market- Driven Solution to Supracompetitive Credit Card Interchange Fees.
- Authors
Arnier Jr., Jeffery C.
- Abstract
In America, credit cards constitute one of the most important payment systems for consumer transactions. The financial institutions that issue credit cards generate only part of their revenue from interest paid by card holders. Fees charged to merchants who accept credit cards, called interchange fees, make up another important source of income. Credit card issuers use their advantageous market position to impose supracompetitive interchange fees. The simplest response to these conditions would he for merchants to impose a point-of-sale surcharge on credit card transactions. In manyjurisdictions, laws that previously would have prohibited this practice have gone off the hooks. But pressure from the major credit card networks and the inertia of long-standing tradition have conspired to prevent widespread adoption of merchant surcharging. Evidence suggests that instead, merchants have responded by raising price levels to offset at least some of the transaction fees they expect to incur in the near future. Credit card issuers funnel much of the revenue generated by interchange fees into rewards programs for the benefit of their customers. Since consumers who hold credit cards and use them most frequently tend to he wealthier and have higher incomes--on average--than consumers who use mostly or exclusively cash, any increase in overall consumer prices to offset interchange fees creates a regressive wealth transfer. Congress should address this problem by passing legislation that creates an incentive scheme by which merchants will have the requisite motivation to impose surcharges on customers who pay by credit card, subjecting interchange fees to downward pressure as consumers move purchases to less costly payment methods. Such a scheme would constitute a procompetitive regulatory intervention that would ultimately inure card holders to a new status quo, eliminate the regressive wealth transfer in place under the current system, and benefit nearly all consumers--except for the small fraction of card holders who expend tremendous energy to extract maximum value from rewards programs to the detriment of nearly all other consumers.
- Subjects
UNITED States; SURCHARGES; CREDIT card fees; USER charges; POINT-of-sale systems; FINANCIAL institutions
- Publication
Texas Law Review, 2021, Vol 99, Issue 3, p621
- ISSN
0040-4411
- Publication type
Article