Regulating Credit Cards

By Marc Tracy

The always-great Independent Street brought word a few days ago of a new report on credit cards and small business (downloadable in full here) from the Small Business & Entrepreneurship Committee that concluded, in the words of the group's president, "Given all of the benefits small businesses and consumers receive from the credit-debit card industry, we should all be concerned about an economic climate featuring a credit crunch, and a policy climate leading to more regulation and restrictions that would only make matters far worse." The group's chief economist, Raymond J. Keating, who wrote the report, clarified, "There are groups leading the charge to effectively impose price controls on the credit/debit card industry through either the courts or Congress. As this report makes clear, such actions would only raise costs and reduce benefits for consumers and small businesses." Translation: small business is best served by the government taking a hands-off approach to credit cards. (Here's where we mention that our sponsor is American Express OPEN.)

Specifically, as Independent Street explains, the report argues that even government meddling with the interchange fee, which is what merchants are charged by credit card companies each time a customer uses a card to make a purchase, ought not to be meddled with. We've written about interchange fees before, and our outrage at them--their massive growth in recent years, their arbitrary nature, their almost-confiscatory quality--prompted us to suggest that policymakers pair passage of a "credit card bill of rights" (for users) with a "credit card bill of rights for merchants".

Independent Street blogger Kelly Spors, while presenting the findings fair-mindedly, also took some issue with them. "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."

For one thing, linking credit cards, and small-business owners' potential use of them to obtain financing for their companies, to the credit crunch is somewhat disingenuous. Yes, as we've reported, credit cards are not a bad alternative to financing when more traditional lines of credit, or bank loans, are not open to you. But by no means are they preferable for this purpose--they charge quite high rates (legitimately) and are subject to immediate and arbitrary rate hikes. Governmental policy to improve small businesses' credit access should basically ignore the credit cards and focus instead on what, actually it has been focused on: banks and other lending institutions, which, unlike credit cards, tend to root for you to pay back what you are owed on time.

Finally, if small businesses' role in the larger macroeconomic scheme is as job-creators, then the government's job should be to encourage them to grow, and to cultivate a situation in which their growth is as uninhibited as possible. Allowing credit card companies to further slice already-thin profit margins with oversized fees--in the process encouraging small businesses to restrict consumers' credit card use and, therefore, consumer spending--is not the way to do this.

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April 1, 2009 9:20 AM