By James Kwak
Most provisions of last year’s CARD Act restricting certain types of behavior by credit card issuers go into effect today. Card issuers, of course, are adapting by seeking out new ways to make money. One, pointed out by Felix Salmon, is expanding their usage of rewards cards, since (according to the Times) they get a higher interchange fee on rewards cards than on other cards. (This baffles me, but whatever.) Rewards programs, as it turns out, are subsidized by everyone in the form of higher prices for all goods bought at retail.
Put another way, this is the credit card industry (partially) shifting its sights from consumers, who benefit from (modest) legislative and regulatory protections, to the retailers, who don’t. It’s also what you would expect when you have extremely high concentration among card issuers (and transaction networks) and low concentration among retailers. Perhaps consumers aren’t the only constituency that needs a little protection.
ABA Argues That Black Is White and Must Stay That Way
By James Kwak
I wasn’t sure if I was going to write about the Whitehouse Amendment, which would allow states to regulate the interest rates charged to their residents. According to a 1978 Supreme Court decision, financial institutions are governed by the law of the state that they reside in, not the laws of the states they do business in; the result was the current situation, where the big credit card issuers are based in South Dakota, because Citibank basically wrote South Dakota’s consumer credit laws. In its essence, the amendment says this: “The interest applicable to any consumer credit transaction [not a mortgage], including any fees, points, or time-price differential associated with such a transaction, may not exceed the maximum permitted by any law of the State in which the consumer resides.”
Obviously I’m in favor of it, as the current system just allows the worst kind of regulatory arbitrage. (Note that administration officials like to oppose strict legislative measures, like a hard leverage cap, on the grounds that these things need to be negotiated internationally so that banks won’t just set up shop in the most lightly-regulated jurisdiction — yet that’s exactly what happens with credit cards.) But I wasn’t sure what there was to add, since Mike Konczal and Bob Lawless have already weighed in.
Then I read the ABA’s argument against the amendment, that gave me all the motivation I needed.
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Posted in Commentary
Tagged credit cards, financial regulation