Keep Congress, courts away from credit cards

Will that be cash or credit?

That question became a lot more meaningful earlier this year when some retailers started charging consumers extra for using a credit card.

The surcharge - a product of a recent legal settlement between retailers and Visa and MasterCard, along with the banks that issue cards bearing their logos - is meant to help merchants recover "interchange fees." Merchants pay these fees to process credit card payments.

But some merchants are now trying to back out of the settlement. They'd prefer that the fight over these fees head back into court - or perhaps the halls of Congress, where legislators could set or cap the fees at levels more to the merchants' liking.

That's not an outcome consumers should hope for. By leaving interchange fees to be negotiated in the marketplace, the settlement maximizes competition among credit-card processors, banks and retailers. Consumers reap the benefits of that competition in the form of lower prices and better services.

The legal battle began in 2005, when a number of retailers jointly filed a lawsuit alleging that MasterCard and Visa effectively held a monopoly over payments that allowed them to set interchange fees at unreasonably high levels - generally between 1.5 percent and 3 percent of the transaction. The merchants claimed that they were forced to charge consumers more than they otherwise would in order to offset those fees.

After seven years of legal wrangling, the two sides reached a settlement allowing merchants to impose a surcharge that is supposed to be equal to the cost of processing a credit card transaction - but can be no greater than 4 percent. The interchange fees themselves remain subject to negotiation between merchants and card processors.

The settlement empowers consumers - not regulators, the legal system, retailers, or credit card companies - to determine how commerce will be conducted in this country.

Some retailers may try to entice consumers by offering lower prices to those who don't whip out their cards in the checkout line. Kroger, the country's largest grocery chain, is "developing plans to incentivize customers to use lower cost forms of payment." That may save both customers and Kroger money.

Other retailers may develop alternative payment mechanisms - to their benefit as well as that of their customers. Fastrac Markets, a chain of gas stations and convenience stores in upstate New York, offers five cents off every gallon for customers who pay with the store's discount card, which is linked to their bank account. "We're trying to defray the cost of credit cards and pass along some of the savings," company CIO Randy Case told USA Today.

Credit card companies will have to compete for consumers' business by making it worth their while to pay with plastic. Historically, they've done so by offering rewards like cash back, hotel points or frequent-flyer miles. According to a 2010 Federal Reserve study, about 60 percent of consumers have a rewards credit card. Consumers may have to decide whether those credit card points are worth the surcharge they may face in the checkout line.

Merchants, meanwhile, can compete for cardholders' business by waiving their right to surcharge, even if it means charging slightly more than their competitors.

The settlement even allows merchants to vary the size of the surcharge. If premium rewards cards cost more to process, for example, then retailers can charge consumers who pay with them more.

All these choices for consumers and retailers would vanish if interchange fees are capped, as some retailers would like. Further, such a move would drive up costs for consumers without yielding lower retail prices.

For evidence, look to Australia. In 2003, regulators in the Land Down Under slashed credit card interchange fees in half. The move ended up costing cardholders nearly half a billion dollars in new fees. The value of reward points decreased by about a quarter.

By 2008, Australian officials had concluded that there was "no evidence" that the increased fees heaped on cardholders were offset by lower retail prices or improvements in the quality of service. And even though the cost to retailers of accepting cards declined, thanks to the interchange cap, merchants were no more likely to accept credit cards.

Australia's experience should make Americans consumers pause. Consumers should make the final decision about whether to swipe their cards or hand over their greenbacks in the checkout line - free of undue government influence. The settlement ensures that they can.