"Economic Madness" by frankieleon is licensed under CC BY 2.0

In an op-ed published in RealClearMarkets today, ATR Federal Affairs Manager Bryan Bashur highlights the distortive effects of government intervention in payment transactions. Government-mandated price controls, such as the cap on debit card interchange fees, harms banks, credit unions, and payment card networks, and provides no benefit to consumers.

Data collected by the Federal Reserve clearly shows that market forces are keeping interchange fees steady. As Bashur points out:

Interchange fees on credit cards, or swipe fees paid to a bank or credit union for the card payment services provided to a retailer, have remained constant over the last decade. The Federal Reserve released a report in August 2021 that shows the rate of an interchange fee on a $40 transaction using a credit card in various types of industries. Fees charged by Visa, Mastercard, and Discover have largely remained the same over the past decade. This is purely determined by market forces because there is no government mandated price cap on interchange fees for credit cards.

Since 2007, interchange fees charged on transactions at gas stations and small retailers have remained constant. Since 2012, fees for e-commerce have remained steady as well.  

The Federal Reserve’s enforcement of the Durbin amendment through Regulation II fails to take into consideration the exorbitant expenses that banks and credit unions must pay to maintain their services. As Bashur explains:

Small banks and credit unions are seeing higher authorization, clearance, and settlement (ACS) costs compared to larger depository institutions. The Federal Reserve’s report on 2019 interchange fees states that “the cost for low-volume issuers ($0.711) was more than 20 times higher than the cost for high-volume issuers.”

These are not the only costs these banks and credit unions must pay. In the report’s footnotes, the Federal Reserve admits that it instructed banks and credit unions to exclude “costs related to corporate overhead, account relationships, rewards programs, nonsufficient-funds handling, nonsufficient-funds losses, cardholder inquiries, card production and delivery.”

By not including these costs, the Federal Reserve is failing to consider the total expenses depository institutions face while it is simultaneously limiting the amount of revenue they can earn under the Durbin amendment’s interchange fee cap.

The Durbin amendment (a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act) is a classic example of an artificial government-mandated price control that is distorting the payment transaction ecosystem. Government intervention has forced banks and credit unions to offset lost revenue from interchange fees. Bashur states that:

Deposit fees increased because of lost revenue from the cap on debit card interchange fees. The Federal Reserve concluded in one study from 2014 that banks affected by the Durbin amendment increased their deposit fees, which includes overdraft fees, on consumers. According to the study, banks “increased deposit fees 3 to 5 percent in response to” the Federal Reserve’s Regulation II.

In 2017, the International Center for Law and Economics found that since the Federal Reserve implemented the Durbin amendment via Regulation II, low-income consumers were harmed by increased deposit fees. According to ICLE, “Low-income consumers are more affected by the bank account fees that arose after implementation of the Durbin Amendment because these fees represent a larger — and increasing — share of their incomes.” ICLE goes on to say that low-income consumers “are also more likely to incur these fees because, e.g., minimum balance requirements are now more stringent.”

Senator Amy Klobuchar’s (D-Minn.) bill, the American Innovation and Choice Online Act (S. 2992), could further harm payment transactions. Bashur explains that:

The bill could be used as a trojan horse to significantly hamstring payment card networks in the United States. Under the bill, the Federal Trade Commission could force payment card networks to share their networks with competitors or even share proprietary security information to comply with the prohibition on “self-preferencing.” This is a surefire way to inhibit firms from investing in more secure and affordable payment technology that would benefit both consumers and retailers.

Bashur concludes that “Congress should think twice before pursuing additional actions that will further hurt consumers while inflation continues to rise to record highs and erode purchasing power.”

Click here to read the full op-ed.