Consumers Stand to Lose From Swipe Card Regulations

By Satya Marar

Politicians and a coalition of powerful retail giants are pushing bills intended to limit the fees that businesses pay when a customer buys things with a credit or debit card.

Bipartisan Senate Amendment 6201 would require cards to allow businesses to route payments through networks unaffiliated with Visa or Mastercard — the nation’s two biggest card issuers and would force issuers to make all payment networks available to retailers for routing transactions, regardless of which one the customer wants.

The amendment’s proponents argue that it will undermine Visa and Mastercard’s hold on the card sector, where they collectively hold 80 percent of the market share, while providing some inflation relief to consumers by lowering transaction costs that businesses typically pass on to them.

But the reality is murkier. The amendment doesn’t mention consumers, and there’s no guarantee we’ll face lower prices at the store or online. Instead, consumers stand to lose from fewer choices, less credit access, less secure transactions, and the evaporation of reward programs and other benefits.

Card interchange fees typically account for just 1 percent to 3 percent of the final price, even when passed on to consumers. Previous restrictions, like the 2010 debit card interchange fee cap, didn’t even lead to cost savings for most businesses. Smaller businesses often saw their costs increase. Only a small number of large retailers experienced lower costs. And 22 percent of retailers increased prices charged to the consumers, while 1 percent lowered prices.

A lack of significant perceived benefits for most retailers could partly explain why Australia, where financial institutions have allowed merchants to choose lowest cost payment networks for routing customer transactions since 2018, has seen low take-up rates for this functionality.

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Moreover, interchange fees help pay for various services, including rewards programs, interest-free periods, and payment guarantees, so merchants don’t have to worry about a customer’s credit history, security protocols, and other banking services. Forcing card issuers to reduce the fees they can levy means cuts to these benefits and programs — reducing consumer choice while deterring fraud protection and cybersecurity innovation.

It’s not just the wealthy who rely on these benefits. Eighty-six percent of credit cardholders have active rewards cards, including 77 percent with a household income lower than $50,000.

Australia’s 2003 interchange fee restrictions resulted in fewer services, fewer benefits and higher annual fees. Americans could soon feel similar pain.

Cardholders are also likely to bear at least some of the estimated $5 billion cost of the technical infrastructure needed for issuers to comply with the amendment. Banks have also responded to previous interchange fee restrictions by hiking the fees that Americans are charged for opening and using checking accounts, with fewer banks offering no-fee accounts.

Lower-income Americans could be harshly affected by reduced access to credit. Credit unions that serve underbanked communities are already expressing concerns about the policy. Credit unions and community-owned banks also rely more on interchange fees to stay afloat than larger banks, which depend more on interest rates. Lower interchange fees could force these institutions to raise interest rates on credit cards, even though they serve a higher proportion of cardholders who don’t carry a balance or don’t pay penalty fees.

Congress can provide long-term inflation and cost-of-living relief by repealing costly, counterproductive regulations that benefit moneyed special interests at ordinary Americans’ expense.

This makes more sense than a misguided payment system regulation that will lower choice, benefits and payment security for cardholders while putting pressure on banks and credit unions to hike interest rates and fees.

Reprinted from DC Journal

Sourced from AIER

Satya Marar is a Washington DC-based policy professional and Australia-trained lawyer.

He was previously the policy director at the Australian Taxpayers’ Alliance, that country’s largest taxpayers’ advocacy group. He has also worked at the Washington-based Reason Foundation and the Sydney-based Centre for Independent Studies.

He holds a Bachelor of Arts and Bachelor of Laws with honors from Macquarie University, and is currently pursuing an MA in Economics at George Mason University.

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