Would heavier regulation of the credit card industry be a bad or good thing for small businesses?
A new 34-page report by the Small Business and Entrepreneurship Council argues that government regulation of the credit card industry ultimately hurts small businesses, by making it harder for card issuers to stay competitive and offer the most flexible terms and best rates to businesses. The report focuses on recent proposals for government regulation of the interchange fee – the fee credit card companies charge merchants on every card transaction. But the report’s bottom-line message is that any government regulations of the credit-card industry limiting how credit card companies do business will ultimately be harmful to the small firms that use them:
“The profits made in the credit-card industry encourage the expansion of cardholders and merchants in the network, as well as investment and innovation, which in turn benefit both consumers and businesses.”
The report struck a nerve in me because so many small-business owners I’ve spoken with in recent weeks are angry with credit card companies right now and wouldn’t mind seeing the government step in and provide them some protection. Many (even ones with good credit ratings) have seen their card limits slashed at a moment’s notice, their rates jacked up or their cards closed by the issuer – sometimes with what seems like little justification. They would like to see the card industry held more accountable for how it treats its customers – especially now that businesses so desperately need access to credit.
What’s more, many merchants – small and large — support regulating the interchange fee, because they are the ones who pay it. In a recent editorial in the Deseret News, Jonathan E. Johnson III, president of Overstock.com, argues that big credit-card companies like Visa, American Express or MasterCard offer little explanation for why they collect the fees from merchants they do and that merchants don’t have the power to negotiate or fight them.
Mr. Johnson writes: “I’m not against the credit-card companies making a living. But they routinely agree to increase interchange fees without any justification or transparency. Not only that, but when somebody commits credit-card fraud with one of their credit cards, they push the cost to the retailer — despite one of the stated reasons for the huge interchange fees being to guarantee that retailers get paid. But there is no guarantee; retailers lose these sales dollars because if there is one credo the credit-card companies live by it is this — if they can take money from us, they will.”
Readers, do you think the government should regulate the credit card industry more or less? Do you think it should put limits on the interchange fee in particular?
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