Capping Interchange Fees Won’t Enhance Consumer Welfare

Each year, financial merchants such as Visa, Mastercard, American Express, and banks process 39.6 billion card transactions in the United States, amounting to 108.6 million transactions each day. To ensure these transactions are processed quickly and securely, financial merchants and banks impose interchange fees on transactions, more commonly known as swipe fees. Last year, merchants businesses paid financial merchants and banks an estimated $44.4 billion in interchange fees.

While swipe fees are an essential part of the financial ecosystem that generate considerable consumer benefits, efforts are underway at the state level to cap interchange fees on both debit and credit cards. Bills in Oklahoma and Tennessee would require “state and local taxes and fees be excluded from the calculation of interchange fees for a card transaction” when the fee is currently based on the total charge. The new calculation would result in merchants paying less in interchange fees to financial merchants. Mississippi was also considering a similar bill, but it died in the committee phase.

While this may seem a sensible policy decision, history shows imposing caps on interchange fees only harms consumers. Additionally, imposing caps on financial merchants’ and banks’ ability to generate revenue could see fewer protections for consumers. Fewer protections would all occur at a time when fraudulent credit card activity is increasing.

As part of the Dodd-Frank Act, the U.S. Congress passed the Durbin Amendment that placed a cap on the fee banks could charge merchants for debit card swipe fees. The Durbin Amendment capped interchange fees at $0.21 plus 0.05% of the transaction. The amendment’s stated goal was to lower costs for businesses that would then be passed onto consumers and stimulate demand during the great recession. Unfortunately, merchants failed to pass these savings onto consumers and banks took steps to recoup $8 billion in lost revenue, while credit card companies cut the availability of rewards.

The Durbin Amendment also denied consumers access to many financial services that used to be free of charge. As a result, banks “reduced the availability” of fee-free accounts and “more doubled the minimum monthly holding required of fee-free” accounts. The Durbin Amendment also saw the introduction of overdraft fees, which allowed banks to collect $11.45 billion in 2017. Maintenance fees that were introduced after the Durbin Amendment passed raised $3.5 billion in 2017.

In total, it’s estimated 1 million Americans lost access to banking services as a result of these fees. The introduction also disproportionately hurt low-income Americans, depriving them access to financial services and unnecessarily reducing their income and forces them to utilize alternative financial services with fewer levels of protection.

Another way financial merchants and banks sought to recoup lost revenue as a result of the Durbin Amendment was the removal of reward programs typically associated with credit cards. Including the loss of rewards, it is estimated the Durbin Amendment cost consumers $3 billion in value.

Interchange fees have also been increasingly important in allowing financial merchants and banks to provide state-of-the-art fraud protection to consumers. In 2019, Visa announced it was investing $25 billion in fraud protection for its customers, while American Express has invested in over 70 companies that specialize in protecting consumer’s finances against fraudulent activity.

Restrictions on the amount of revenue that could be generated from interchange fees would mean these investments would not be viable, leaving consumers’ finances at risk from fraud and cyber-crime.

These restrictions would also occur at a time investment in advanced cybersecurity is needed most. Industry experts that during 2020, fraudulent activity amounted to $11 billion, a 27% increase from 2019. With financial fraud on the rise, now is not the time to limit financial merchants’ ability to invest in fraud protection for consumers. Doing so will only leave consumers’ hard-earned money vulnerable to criminals. While capping interchange fees may seem an attractive policy proposal for state legislatures, consumers will be the ones left suffering through reduced access to financial services, fewer credit card rewards, and fewer protections against fraudulent activity. If states want to protect consumers, they should look to the effects of the Durbin Amendment and the significant investments these fees have allowed and kill bills that limit interchange fees.

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