GAO Follows Congress's Punt On Interchange Fees With Its Own Punt
The question of whether Congress, or the Federal Reserve, is serious about taking steps to contain the escalating costs of interchange to merchants and consumers has resonated for years. And for years the stock answer to that question was that such action was unlikely.
The outlook for regulatory action seemed to improve last year when the regulatory climate in Washington changed. It now appears that the improved outlook may only have been illusory as the Government Accounting Office proves just as adept at punting as Congress.
As part of the Credit Card Accountability Responsibility and Disclosure Act (or “Credit CARD Act”) of 2009, Congress directed the GAO to study the issue. At the time, cynics schooled in the ways of Washington saw the GAO study as a way to defer and ultimately postpone any serious action on this issue. Based on the GAO’s recently disclosed report, they were right.
The report begins with the entirely antiseptic title — Rising Interchange Fees Have Increased Costs for Merchants, but Options for Reducing Fees Pose Challenges — and then manages to go downhill from there. The GAO identifies the real reasons why Congress (or the Federal Reserve) should take action regarding interchange: that the system reflects Visa and MasterCard’s market power over merchants; that interchange is not tethered to any efficiency rationale; and that it regressively imposes a hidden tax on all consumers, including the cash customer, while subsidizing the more affluent customers and their use of rewards cards. And then it punts by making no real attempt to analyze these issues or address the serious ways they can be fixed.
A typical whitewash is the statement that “consumers who do not use credit cards may be paying higher prices for goods and services.” Like many apologists for Visa and MasterCard, the GAO recycles the trope that because of the many influences on retail pricing, there is no definitive proof that the mandated reductions of interchange in Australia resulted in lower retail prices and, thus, one cannot safely conclude that higher interchange leads to higher prices. But that focus ignores the basic economic truism that in a competitive market, such as retail, virtually every economist would predict that higher costs such as interchange are passed along to consumers. The GAO’s punt does not end there, though. Having downplayed the regressive aspects of interchange, the report then buys into another baseless argument propogated by Visa and MasterCard and the banks — that a reduction of interchange may lead to higher cardholder fees, which would not be a good thing for consumers.
Once again the GAO ignores basic economic principles. Imposing the costs of the system on those who actually use it would be considered efficient by most economists, particularly when compared to the current system that hides the true costs to consumers. But in the hands of the GAO and the press that eagerly parroted this whitewash of the current system, the potential for higher cardholder fees is considered a reason not to take action.
So to those who question whether Congress is serious about interchange, you have your answer. No.
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