The Cost of Using Plastic May Be Going Up

Will that be cash or credit? While that seems like a simple question, there is a lot riding on your answer. In fact, about $30 billion annually goes to banks and card networks in the form of interchange fees.

So why do retailers pay this fee? Why don’t they charge consumers more if they use a credit card? One answer may be that customers won’t cotton to such practices. But a more immediate reason is dead simple–Visa and MasterCard won’t let them. If retailers charge more for plastic, Visa and MasterCard won’t let them use their payment networks.

But all of that is about to change.

In a long-running dispute between retailers and Visa/MasterCard, retailers (notably Kroger and Safeway) have been fighting for their right to charge more for plastic (or less for cash). Word on the street is that these lawsuits will settle before they are scheduled to go to trial in September.

So is this good for consumers? That’s a tough question to answer. Certainly giving consumers the choice to pay a little more if they use plastic or a little less if they use cash is a good move. It’s good just about anytime consumers have more choice.

But what about credit card rewards? If the credit card industry takes a significant hit from these changes, we could see rewards curtailed. Many believe that this change would force the card networks to lower their interchange fees in order to “compete” with cash purchases. With lower interchange fees, there would be a lot less to go around in the form of cash back, travel, or other rewards.

And zero percent credit cards could also take a hit. While some of the cost of 0% introductory rates is offset by fees on balance transfers, there are no fees for purchases. Instead, the card companies rely on the interchange fees to absorb the cost of not charging interest. If the interchange fees go down, however, there will be less revenue to offset these costs. As a result, we could see 0% offers reduced or disappear altogether.

According to the WSJ, a settlement is likely to have three components:

1. Payments by the defendants ranging from $8 billion to $12 billion;
2. A temporary reduction in interchange fees; and
3. The elimination of the no-surcharge rule

We’ll keep you updated as this story unfolds.