Credit History

Mark Lenz

It's been 60 years since the founders of Diners Club issued the first multi-purpose private charge cards, more than 50 years since Bank of America's BankAmericard proved that the mass-issued personal credit card was a workable concept and more than 20 years since debit cards came into common usage. The amount of time that personal cards have been available, along with the sheer utility they provide, have made them a fixture in the lives of modern consumers. Cards, and card-related banking services have proved wildly popular, profitable and, as the economy has slowed, troubling, for issuer and user alike. While the cards and services have been wildly popular, the associated fees charged by the card companies and banks have not been as popular. This week, Congress, as part of its comprehensive financial reform initiative, enacted changes to the credit/debit card industry that bear close examination.

The most immediate impact of reform is that retailers transacting significant business with debit cards will benefit from lower interchange fees on transactions using that use debit cards. Several retail industry organizations, including the National Retail Federation and the Food Marketing Institute have long advocated for change of this nature. The current interchange charge represents a significant cost for retailers, and significant income for the credit card companies and banks. Because of the new legislation, banks and credit card companies will have to base the interchange rate on debit transactions to the specific cost of the debit transactions. This change will have the greatest benefit for low-margin retailers such as grocery stores, where margin rates often approximate the interchange rate. Retailers will have the option of passing along cost savings to their customers, using savings to add value in another part of the business, taking a higher profit or some combination of the above - supporters of the reform believe that a substantial portion of the savings will go to customers. It is likely that of the attention paid to where the cost savings go will force retailers to pass at least some of the savings on to consumers. The oversight contemplated by the bill should prevent the savings from being simply converted from bank profits to retailer profits.

Another key feature of the new bill is allowing certain retailers, such as gasoline stations, to offer discounts for purchases made with cash or debit card versus credit card pricing - a practice that has been prohibited under many current agreements. Customers who use debit cards or cash will then not have to pay costs for which they receive no benefit, but retailers will be able to set minimum purchase levels (no higher than $10) for use of a credit or debit card, something that they cannot do today under their agreements with the credit card companies.

However, the banks and credit card companies unlikely to stand by while more than $20 billion in income is taken away. After all, they have shareholders with expectations of a return on their investment as well. Although retailers will laud the benefits instituted by the reform bill, the banks will assuredly look to new charges, or reductions in benefits, similar to what airlines have done. Many of the increases will fall on the same consumer that is saving on retail transactions. Perhaps it will be the end of no-cost checking. Maybe it will be less cash back on credit card transactions. It could be that there will be fewer airline miles available in conjunction with affinity credit cards. Reform is in early days, and none of the changes above is certain, but all have been discussed as the bill has moved towards passage.

The consumer card industry has had decades to establish itself in the hearts, minds and wallets of consumers. It is unlikely that reform will win over all concerned parties overnight. It is clear, though, that consumer credit and debit for retailers and their customers will be changing.