Australia's credit card woes mirror ours at home

When it comes to credit card regulation, American policymakers soon could be peering Down Under for a model or a cautionary tale -- or both -- when it comes to reigning in fees and some of the unintended consequences that can result.

In a twist on the usual tale of fee-plagued consumers, the New York Times highlights the fees credit card companies slap on merchants - and exposes how a well meaning attempt to curb those fees via legislation has led to merchants sticking their customers with added charges instead.

At issue are a host of charges credit-card companies charge merchants for the privilege of accepting credit cards. The charges are nominally small, generally just a penny or two, but they add up to big bucks for the banks that issue the cards -- and big losses for the merchants.

Merchants said these practices hurt consumers, especially cash-paying customers who effectively subsidized card users by paying higher prices the merchant had to implement as a result of the credit card fees. (Debit card transactions also carry fees, but these aren't as high as credit card fees.)

In 2003, Australia mandated that the largest of these per-transaction charges, called "interchange fees," be slashed. Banks responded by sharply curtailed rewards and frequent-flier programs to grab back some of that lost revenue. In addition, they hiked annual fees and slashed grace periods, forcing consumers to pay up or pay interest sooner.

All of this is bad enough, but the Times reports that merchants are adding insult to injury by sticking customers with surcharges for using their cards. That's right, they're charging customers to whip out the plastic even though they're actually paying less than before in bank fees.

In principal, a surcharge might make a buyer think twice about whipping out a credit card to pay for their morning coffee, which is a good thing. But for some purchases -- like airline tickets, an example mentioned in the article, online shopping and purchases for which the user wants recourse if they need to dispute the charge later -- consumers may feel as if they have no choice but to use a credit card and be penalized. It's a lose-lose for the consumer. They're penalized by the bank with high annual fees and skimpy rewards programs, and they're charged by the merchant on top of that.

Currently, stores in the U.S. aren't allowed to charge credit card users more for the same purchase as someone paying cash. There are a few exceptions to this, such as gas stations, but the practice is prohibited for most retailers. There is concern, though, that legislation intended to help make credit-card transactions and charges more transparent could backfire if such laws give merchants enough wiggle room to slap their own set of fees on buyers.

It's a tricky situation without a clearcut solution. Many would argue that merchants as well as consumers have a right to be free from fees inflicted on them by credit-card issuers, but if the solution involves creating a loophole that lets retailers add the same kind of surcharges we've been trying to dodge from the credit card companies, we won't have gained anything except another layer of legalese.

If Australia's situation reveals anything, it's that even the best intentions can have unintended consequences.
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