Reducing The Ubiquity Of Credit Cards Makes Little Sense

For the last few decades there has been a concerted push both in the U.S. and elsewhere to discourage the use of cash for everyday transactions. The problem with cash is that it facilitates illegal activity and tax avoidance, which reduces tax revenue and necessitates greater law enforcement expenditures. The nation’s tax gap—the difference between what is owed in taxes and what is paid—is nearly $400 billion. 

The more retailers that accept credit cards, the more practical and advantageous it becomes for people to obtain and use credit cards. In the last few years the country has reached a critical mass whereby it’s now quite easy for someone to spend a day shopping and running errands and forego cash altogether. Even payments among friends—splitting a bar tab, for instance—can be done without resorting to cash. 

By and large, this ubiquity has not only reduced tax evasion and black market activities, but it has made life easier for tens of millions of households and saved businesses nearly $100 billion per annum as well by reducing the costs of handling (and securing, and transporting) cash or transmitting checks. Each of these has been proven especially true since the advent of the Covid-19 pandemic, which has forced people to drastically change how and what they purchase. As online and remote purchases have increased dramatically in the last three months, so has the proportion of transactions using credit or debit cards.

However, there have been complaints about the increasing ubiquity of credit cards: for instance, some retailers bristle at the fees that banks charge to provide stores the ability to take credit cards. They aver that these fees—which are typically two to three percent of the cost of a transaction—are disproportionate to the services provided. 

They also complain that increase in fees has been driven by consumers’ increasing predilections to use cards that provide more rewards—and concomitantly cost retailers more to process. A recent Wall Street Journal article that interviewed several retailers upset with the cost of using credit cards and suggested that they be allowed to refuse cards with higher fees. 

However, doing so would be a disaster. Creating a system that allows stores to reject certain types of cards would serve to reduce the use of credit cards and undo the recent gains. If people cannot be sure their credit card will be accepted at certain stores, they will be less likely to use them or visit shops that will not accept them, and the use of cash—and its attendant costs—will increase, as will the tax gap. 

It is also not the case that only the wealthy are availing themselves of these cards; given that fully 80 percent of the population has a reward card, it strains logic to say these are solely the province of the rich. In fact, banks shelled out nearly $50 billion in rewards last year to incentivize card uptake. 

Several large retailers is the incipient creation of a real time payments network by the Federal Reserve, but this will not reduce costs either. For starters, the Fed has stated that this will take at least five years to complete (it announced its intent to do so a year ago and has yet to begin) and cost it billions of dollars. Given that the law prohibits it from subsidizing the provision of any services, it will have to charge at least enough for it to recoup its costs. Since the Clearinghouse—a not-for-profit utility that processes payments for banks along with the Fed—recently rolled out a real time payments network of its own that already reaches over half of all U.S. residents with a bank account, it is hard to see who would benefit from a second, redundant, costly, government-run network. 

Some retailers have suggested that the interchange fees amount to an effective tax on consumers that ultimately pushes up their costs, but that’s a facile perspective that obscures the fact that consumers receive significant benefits from the ability to use credit that more than outweighs interchange costs, not all of which is borne by consumers to boot. 

Providing payment services is not cheap: credit card companies have to vigorously monitor accounts and take other actions to reduce fraud. It is in their interests to do so since fraud costs them billions of dollars each year. For instance, the recent migration to chip cards has taken over half a decade and necessitated the adoption of new readers at every single retail establishment in the country. It is still not complete.

We should consider it fortuitous that most households have credit cards—especially in the current crisis—and we should avail ourselves to do more to help those without bank accounts and credit cards to obtain them as well. However, efforts to allow stores to pick and choose which cards to accept, or by the Federal Reserve to offer a competing real time payments service, are counterproductive in these efforts and would impose additional costs to the government and the broader economy.