Lowering exchange fees is a recipe for disaster
Again and againcongress introduce a law that advocates for this a new form of price control claims that this is necessary to protect consumer rights. Time and time again, these price controls fall short of expectations, often to the detriment of the very consumers they are intended to protect.
In 2010 this was the Durbin Changethe cut and capped the fees banks could charge businesses for debit card transactions. now some Members of Congress are again advocating a similar cap on transaction fees, but this time for credit cards. Unfortunately, unless Congress changes course, the outcome will be the same.
In 2010 after the events of The Great DepressionCongress passed the Dodd-Frank Act, a federal law misleadingly titled “Dodd-Frank Wall Street Reform and Consumer Protection Act.” This law, aimed primarily at curbing Wall Street’s perceived excesses, also included a provision called the Durbin Amendment. This change allowed the government to cut and cap the amount banks could charge merchants for debit card transactions.
These transaction fees, also known as exchange fees or throughput fees give banks an opportunity to recoup some of their costs on essential services like low-cost lines of credit, state-of-the-art fraud protection, and free rewards and mileage programs. However, Congress ruled that these fees were too artificially high and harmful to retailers, who might then pass these costs on to consumers in the form of higher checkout prices.
As a result, Congress imposed a strict cap on debit card interchange fees at 21 cents plus 0.05% of the transaction value. The negative effects were immediate.
Banks that had previously relied on the ability to raise money by increasing interbank fees were now forced to look for other ways to save, such as cutting back on popular services such as free checking accounts, Zero Liability Protectionand Debit card rewards programs. For example a 2012 learn A study conducted by Pulse found that “50 percent of regulated debit card issuers with a rewards program ended their own in 2011.”
To make matters worse, there is little evidence that savings have been passed on to consumers. A University of Chicago learn The study, published in 2013, found that consumers likely lost between “$22 billion and $25 billion” as a direct result of the Durbin Change. newer estimates put that number at $106 billion.
Regardless of the true cost to consumers, there is ample evidence that the Durbin Amendment has failed to achieve its primary objective and harmed consumers in the process. Any legislation attempting to replicate the Durbin Amendment by lowering and capping credit card interchange fees would be a recipe for disaster.
American credit card issuers currently offer consumers a variety of benefits, including a variety of rewards programs that allow customers to get money back or earn points toward travel. It is estimated that only reward programs are generated 50 billion dollars for US consumers and 86 percent of Americans are active members.
If the credit card market were to introduce a reduction and cap on interchange fees, these perks and rewards programs would most likely be discontinued. This would be unfortunate given their immense popularity and the fact that it comes at a time when many Americans are struggling to find savings in mid-life record inflation.
Unfortunately, it is so lower income Americans who would be most affected by a reduction and cap on interchange fees. They are the least equipped to deal with more expensive lines of credit and would likely find no relief in lower retail prices.
For example research by Phoenix MI found that “of households earning less than $20,000 per year, 82% have a rewards card and 90% of their spending is on that card.” Because cutting and capping fees would cause free credit cards and rewards programs to be phased out, consumers, particularly those on lower incomes, would be worse off.
Proponents of price controls will continue to argue that the Durbin Amendment’s cuts and increases in the interchange fee cap on credit cards will be a win for consumers, but if they prevail, reward programs and short-term lines of credit will be far from the only benefits consumers lose . The credit market continues to function as it was intended. Nothing good will come from government intervention to change this.
Steve Pociask and Nate Scherer work at the American Consumer Institute, a nonprofit education and research organization. You can find more information about the institute at www.TheAmericanConsumer.Org or follow us on Twitter @ConsumerPal.