Credit Card Companies Figure Out How To Spin Straw Into Gold

by Mercator Advisory Group 0

In a highly visible commentary, this Washington Post article recounts many well known (to the payments industry) arguments against discount/interchange-based credit card pricing, most notably as a revenue source to fund rewards programs. Additional concerns with the interchange/rewards relationship include the following argument:

There are two other reasons for the public to be concerned about the arms race in premium awards card.

The first is that the current kickback arrangement is highly regressive. A study by the Federal Reserve Bank of Boston found that households with annual incomes of less than $20,000 pay an extra $21 a year in higher retail prices as a result of merchants’ credit card fees, while households with incomes of $150,000 benefit by $750. The reason is simple: Poorer people tend to do more of their business in cash and don’t qualify for many high-reward cards.

The other is debt. One common rationale that the industry gives for high-reward cards is that they help to “lift” merchant sales by getting customers to spend more than they otherwise would. While that might be true for an individual merchant, it can’t be true for all merchants unless it increases overall household income (unlikely) or induces consumers to save less and take on more debt.

With the rollout of the Durbin amendment underway on the debit side, attention will inevitably focus on credit pricing, including credit card APRs. (H.R. 336, the “Interest Rate Reduction Act”). 2011 looks to be a busy year for all payments stakeholders.

Read more here: http://news.google.com/news/url?sa=t&fd=R&usg=AFQjCNGqfcQje_cOa6xQU-8JxRnjRoHTqQ&url=http://www.washingtonpost.com/wp-dyn/content/article/2011/02/04/AR2011020407860.html