Cutting interchange fees is a recipe for disaster
Every so often, Congress introduces a piece of legislation advocating for some new form of price control claiming it is needed to protect the rights of consumers. Yet, time and time again these price controls fail to live up to their expectation, usually to the detriment of the very consumers they were designed to protect.
In 2010, this was the Durbin Amendment, which cut and placed a cap on the fee banks were allowed to charge businesses for debit card transactions. Now some members of Congress are again advocating that a similar cap, on transaction fees, but this time on credit cards. Sadly, the outcome will be the same unless Congress changes course.
In 2010, following the events of the Great Recession, Congress passed the Dodd-Frank Act, a federal law deceptively titled the “Dodd-Frank Wall Street Reform and Consumer Protection Act.” This Act, while primarily designed to rein in the perceived excesses of Wall Street, also contained a provision called the Durbin Amendment. This amendment allowed the government to cut and place a cap on the amount banks could charge merchants for debit card transactions.
These transactions fees, also known as interchange fees or swipe fees, allow banks the opportunity to recoup some of their costs on important services such as low-cost lines of credit, state-of-the-art fraud protection, and free rewards and miles programs. However, Congress decided that these fees were too artificially high, and harmful to merchants who may then choose to pass these costs onto consumers in the form of higher prices at checkout registers.
As a consequence, Congress set a strict cap on debit card interchange fees at 21 cents plus 0.05% of the transaction’s value. The negative effects were immediate.
Banks, which previously relied on the ability to raise money by increasing interchange fees, now had to look for other ways to save such as by cutting popular services like free checking accounts, zero liability protection, and debit card rewards programs. For instance, a 2012 study conducted by Pulse found that “50 percent of regulated debit card issuers with a reward program ended theirs in 2011.”
To make matters worse, there is little evidence that any savings were passed onto consumers. A University of Chicago study published in 2013 found that consumers likely lost between “$22 and $25 billion” as a direct result of the Durbin Amendment. More recent estimates put this number at $106 billion.
Whatever the true cost to consumers, there is ample evidence that the Durbin Amendment failed to achieve its primary objective and harmed consumers in the process. Any legislation that seeks to replicate the Durbin Amendment, by cutting and capping on interchange fees for credit cards, would be a recipe for disaster.
American credit card issuers currently offer a range of benefits to consumers including a variety of rewards programs that allow customers the opportunity to get money back or earn points towards travel. Rewards programs alone are estimated to generate $50 billion for U.S. consumers and 86 percent of Americans are active members.
If cutting and capping interchange fees were introduced to the credit card market, it is highly likely that these benefits and rewards programs would be discontinued. This would be unfortunate considering their immense popularity and the fact that it comes at a time when many Americans are struggling to find savings in the midst of record inflation.
Unfortunately, it is lower-income Americans who would be hurt the most by cutting and capping interchange fees. They are least equipped to deal with more expensive lines of credit and would be unlikely to find any relief in lower retail prices.
For example, research by Phoenix MI found that “among households earning less than $20,000 per year, 82% own a rewards card, and 90% of their spending dollars are charged to these cards.” Because cutting and capping thee fees would result in ending free credit cards and terminating rewards programs, consumers, particularly those with lower incomes, would be left worse off.
Advocates of price controls will continue to argue that cutting and expanding the Durbin Amendment’s interchange fee cap to credit cards will be a win for consumers, but if they get their way, rewards programs and short-term lines of credit will be far from the only benefits consumers lose. The credit market continues to operate just as it intended. Nothing good will come from government intervention to change it.
Steve Pociask and Nate Scherer are with the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit us on www.TheAmericanConsumer.Org or follow us on Twitter @ConsumerPal.