January 20, 2010
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The Next Stab at Credit Card Companies, Pt.1
What's wrong with capping the rates?While new credit card legislation that becomes effective on February 22nd will serve to limit lenders from arbitrarily increasing interest rates and imposing unfair fees on consumers, the law does not address another growing concern. Controversy is growing over the need for government rules that will cap credit card interest rates and interchange fees. Interchange fees are fees that merchants pay as a percentage of each credit card transaction they process. A portion of the fees goes to the merchant's bank, the customer's bank, and the major card network such as Visa or MasterCard. Opponents of such action say that capping these rates would only serve to harm the consumer who would end up paying more for the products they purchase. There is also the argument that any type of government regulation (as in the case of the reform law) will limit credit availability.
It is clear that interest and interchange fees are necessary and valuable in offering quality service and protection to credit cardholders. Such fees pay for operating and risk taking expenses that allow banks to provide a valuable service include administrative costs such as billing and collection; fraud recovery, customer service; credit losses, personnel support in resolution of disputes, and the cost of borrowing. Basically, credit card issuers generate revenue from three entities: interest charges, interchange fees, and penalties due to late payments and over-the-limit fees. A fee that had become almost extinct, the annual service charge, has been re-introduced by many lenders over the past few months as a backlash from the new card reform legislation.
Credit Unions have become more popular among borrowers due to their competitive pricing and products. These organizations typically lend to the prime customer who carries less risk and have proven to be more responsible. Because credit unions generate less revenue on interest rates and fees, these companies depend more heavily on credit card transaction fees. So what's the controversy and who's saying what? Find the answer in part two.