July 19, 2012

The reluctance of governments to tamper with credit card interest rates or merchant fees symbolizes the silent omnipotence of banks and financial institutions in the credit society. To even talk about it is considered blasphemous by today’s highest priests of finance and commerce. 

This trepidation dates back to the wild west of credit cards in Canada, the 1970s, when some governments championed the cause of consumers and sought to level the playing field between gigantic and powerful corporations and consumers. Nothing was ever done about interest rates charged except criminalize them at 60% per annum. The criminal rate of interest at 60% did actually capture fees, bonuses and other hidden charges which helped governments protect the public interest by curtailing the abusive lending practices of small loan companies. Despite years upon years of consumer complaints and horror stories to government regulators, both provincial and federal, it took a long time to actually see any effective action against usurious and criminal rates of interest. This finally came in the form of a class action lawsuit launched by consumers in 2003 which didn’t get settled until 2010. Details of the settlement may be seen at

http://www.moneymartclassaction.com/sites/default/files/799274_notice.pdf

In some respects the breach of the criminal code by certain lenders legitimized 28% per annum charges on the retail merchant credit cards and the 18% plus charged on the bank credit cards. Little has been said about the merchant fees or the profit spread between the Bank of Canada’s prime interest rate and the bank charge cards.

No doubt the pleasure received by many consumers from using credit cards instead having to save and budget transcended any serious consideration about the cost of credit or the price of the products. This is the best kept secret of all. Credit cards liberated consumers from their bank accounts and cash reserves. They no longer had to save and budget. This invisible mystique of the credit card, how consumers just kept on borrowing more and more, each and every year from the 1970s to 2012, from $20 billion to $486 billion benefited the economy, the merchants, the banks and the consumers.

Everyone seemed to benefit – except the gradual fall into a deeper and deeper hole of debt resulted in numerous consequences beginning in the 1990s with record levels of bankruptcies, insolvencies, marital breakdown and the revelation that the middle class had been impoverished by the erosion of incomes and an unhealthy dependency upon consumer credit to make ends meet.

It was in the 1990s when we realized we needed each other. The economy needed the consumer to spend and the merchants needed the sales. The credit card made it all happen. So, what occurred after the mid 1990s would be best described as wilful avoidance of debt and debt problems. We turned a blind eye away from the pathological side-effects of debt and looked at the sunny side of the technological age, electronic transfers, internet banking and internet shopping.

Meanwhile the slumbering if not festering realities of an economy fuelled by debt finally poked through the silence in 2007 – 08 via the US credit crunch. The topic of debt has been much more publicized in the media, but the focus has been on bad mortgage lending and some European governments that have stumbled to the precipice of insolvency. More recently, several US cities have declared their insolvency through bankruptcy proceedings.

Meanwhile the consumer has been largely kept out of the spotlight except for the Canadian federal government’s recent regulations on mortgage lending that reduce the lending period from 30 to 25 years all in the name of household debt. There are many conceptual problems with this approach, one of the main ones being a lack of action with respect to consumer credit – a complete avoidance of indefensible credit card rates of interest when the Bank of Canada’s prime has been the lowest ever for the last couple of years at 1 per cent. Moreover, I haven’t heard any discussions about how interest on $486 billion drains the economy of much needed cash.

In many respects this symbiotic relationship with consumers, merchants and banks may throw a little light on how the matter of merchant fees for credit card transactions have successfully avoided public attention. However, the Money Mart litigation that concluded in 2010 made it clear that the cost of borrowing includes fees, commissions, bonuses and any other hidden charges.

I am not sure if the merchant transaction fee is a hidden charge although most consumers have been oblivious to it. The issue finally made its way into an American court system resulting in a $7.25 billion settlement with U.S. over the fixing of credit and debit card fees in what could be the largest antitrust settlement in U.S. history.

This raises the profile of what merchants have been forced to pay the banks for accepting their credit cards (merchant fees) in addition to interest rates as a cost of credit. The secret is out. Merchants will likely be able to disclose these fees to the consumer and presumably pass them along to them.

One of the Canadian banks has made it exceeding clear that what happens in the USA stays in the USA. In other words, nothing will change in Canada.

So, with respect to interest charges and the merchant transaction fees, the Wild West continues in Canada. Perhaps what we need is a new sheriff in town.

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