President Trump followed up his populist push, adopting traditionally Democratic economic talking points like capping credit card interest rates, with an endorsement of limiting merchant swipe fees using the Durbin-Marshall Credit Card Competitive Act. He doesn’t seem to understand that this would harm consumers and benefit retail businesses.
However, the legislation isn’t going anywhere. It’s good election year politics. And it unlocks plenty of campaign funding on both sides of the issue. It also underscores just how far the Republican Party has moved away from markets and freedom, towards micro-managing the economy.
The bill is a government-mandated transfer from consumers to retailers. The bill forces card issuers to add another payment network option and letting merchants choose the routing, so merchants capture the “savings,” while cardholders lose the incentives that were paid for by interchange.
It doesn’t “create competition” networks compete for card issuers today with long-term deals (pricing, marketing support, economics) that help fund rich rewards. The bill outlaws this competition.
It’s a subsidy to American Express (and a weird way to “break a duopoly”). It effectively elevates Amex/Discover, requiring Visa and Mastercards allow a second network to process each card (and the second network cannot be Visa or Mastercard).
The “prices will go down” promise hasn’t been true anywhere else. Even if interchange fell, merchants don’t pass through savings in a way that makes consumers whole. Consumers lose out on rewards, but prices haven’t fallen anywhere this has been tried like Europe or Australia.
Durbin’s debit card experiment already showed the bad consequences. By capping debit interchange, free checking accounts were no longer profitable and banks started requiring direct deposit or minimum account balances. That pushed the most marginal out of the banking system, and into check cashing stores. Rewards evaporated. We’re only just now seeing rewards debit again (United, Southwest, and Wyndham) because of loopholes in that law. And the Durbin Amendment to Dodd-Frank financial reform didn’t lower prices, either.
Foreign experiments prove out the negative effects. Australia is a cautionary tale. Rewards get capped, annual fees rise, and loyalty devalues to fit the new economics. Qantas devalued its points to align with the changes, so that cards still earned at least a point per Australian dollar – redemptions just cost more points. And when merchants there were allowed to surcharge, the government had to impose new rules on the merchants who were taking advantage of consumers with fees much higher than their card acceptance costs.
Card interchange pays for a bundled service people take for granted, and that bundle is valuable. Global acceptance, instant authorization andliquidity, fraud management, currency conversion, and purchase protections and chargebacks are funded by the economics of the system. Cut the economics, and you gut that service and the protections – things that are core to economic growth and expansion. You don’t want to push that button.
You’re not just cutting “points” you’re shrinking credit availability, especially for marginal borrowers. Make lending and card processing less profitable, issuers won’t make as much of it available, and the people least eligible for credit get pushed toward worse substitutes like payday lending.
Moreover, rewards are crucial for air travel volume and affordability, a driver of route decisions, and a driver of economy activity. Major airline profitability is tied to cards. Delta says they’re building up Austin flights because of their American Express deal. Southwest moved into Hawaii to offer cardmembers a reason to earn (since they lacked partners members could redeem on to places like Europe). Gut that and you get fewer flights and more expensive seats.
The “reverse Robin Hood” story is backwards. Card acceptance is often cheaper than cash once you count labor, shrink, error, and insurance. Clerks pocket cash and make incorrect change. Cash is a target for theft and large cash balances drive up insurance costs. Different merchants have different cash acceptance costs, but estimates range from 4% – 15% depending on industry, which is more expensive than card acceptance. Credit card processing actually subsidizes cash customers.
Ultimately, merchants benefit from card swipe fees. It means more transactions, and higher average transaction price. Consumers aren’t limited in their purchases by cash on hand, or even paying attention to the amount in their checking account at a given moment (having to wait for their paycheck to come in and clear).
The real subsidy is from consumers who borrow on cards to those who don’t. And poorer consumers use cards, too.
A lot of the politics here is fundraising, not consumer welfare. By rattling cages on that going into effections – and this is an election year – politicians open up the checkbooks of both retailers and banks. Congress doesn’t actually legislate much anymore, but using this issue as a stalking horse funds campaigns.
Wild. So, Bernie and #47… sittin’ in a tree… Anyway, anyone else see bank stocks mostly down yesterday, even with decent earnings reported, in-part due to this 10% proposal, and also #47’s recent threats to the independence of the Fed? Folks, he really should not be messing with either thing; let Congress and the Fed do their jobs. Most of us pay our cards in-full, each and every month, anyway. The folks who don’t… tend to subsidize our hobby… *cough*
@Gary: “By capping debit interchange, free checking accounts were no longer profitable and banks started requiring direct deposit or minimum account balances.”
Not so. here is no connection between interchange caps and checking account fees. The ‘academic’ papers that claim that are pseudo-science, junk science, and rubbish.
@Gary: The biggest effect, and the one that should be front and centre in any criticism, is that lots of people will be denied credit cards. At 10% interest, only the 800+ crowd are worth giving any credit to, and not as much as at 25%.
Trump just always picks the worst side of any issue. I don’t even have to read about the issue as long as I know what his views are, and choose the opposite .
@Gary: “The “reverse Robin Hood” story is backwards. Card acceptance is often cheaper than cash once you count labor, shrink, error, and insurance.”
No. You are ignoring evidence against this that is right in your face. Merchants offer discounts for cash — not credit. Cash must be cheaper. You keep repeating this falsehood despite being shown the evidence. You would make a terrible economist.
Places that are ‘all credit’ are a new, rare, phenomenon confined to a few luxury markets and the decision is based on bearing the cost of cards, not the abscnce of those costs.
As if they care about consumers…this is all about maximizing profits to card issuers while making it sound like a benefit to consumers. It isn’t, but the majority of cardholders will never understand that.
@Ron — Reminds me of #47’s push for 50-year mortgages… buy your home, twice!
Australia is a cautionary tale?? Qantas devalued again, who’d have thought eh. Qantas Frequent Flyer was already the world’s worst program for redeeming flights – miles-cost typically double that of AA for the exact same seat – and with its captive market Qantas goes rampaging downwards again and again, these devaluations are nothing to do with interchange fees and everything to do with an uncontrolled monopoly/duopoly.
The unbanked population was a serious issue prior to passage of the Durbin bill.
Gary is on target. All things being equal, it is usually more expensive to accept cash.
https://sbecouncil.org/2024/07/01/the-cost-of-cash/
The key is “all things being equal”. The obvious reason a merchant will accept cash and offer a discount is that they are more likely to “accidentally” forget to report those payments to the IRS.
@ Gary — I think the Feds should cap credit card interest rates at 10%, ban credit card cash-like transaction fees, and mandate a minimum savings acount rate of 15%. That would help consumers. 🙂
This is a bad idea, same as interest caps. As with all free market distortions, there are always unintended consequences. The predictable result will be of course a reduction in rewards, but also those with bad credit will be cut off completely from credit access. The potential revenue is not worth the risk. It’s completely unnecessary too, since there is plenty of competition in the payments space.
Unlike most leftists, I’m not a blind drone that follows whatever their leaders say, or instinctively opposes something just because trump is in favor of it (even if they were in favor of it 2 years ago).
@Gene — 15% interest on savings? Wowza. Gene for President!
@Mike P: A moment’s thought will tell you that it can’t be taxes. The IRS et. al. would simply choose audit targets based on the size of their cash discounts.
Gary I think your take on this is dumb.
This indeed a pro small business case. As a small business owner the 3% fee we eat is ridiculous and basically a hindrance to growth. It does in fact add to the cost of goods and services rendered. The majority of which is put on small business who can’t negotiate interchange fees like Amazon, Walmart, McDonald’s and other large institutions can.
You act like consumers will benefit? The average consumer isn’t into the credit card game like your readers are. Your readers are going to be typically more educated, and more highly compensated than the average card user. Those taking massive advantage of points and flights are indeed higher income indivudls who have time and discretionary income to chase sub after sub… like me.
With the point game i average over 30k annually in pure sign up bonuses and points. Im not fooled to think that large institutions are the ones paying this… Bo it’s the average consumer with low credit score, who carries a balance, and typically sticks to 1 card that pays me.
Just because we enjoy playing this game should t blind you to the facts here.
A cap on interchange fee is successful as is seen in Europe. You put Australia as an example, but Europe is just fine. Will those of us are avid points and sub subscribers hurt a bit yes? But transactions fees will drop and we’ll stop seeing the growth of 3% credit mark ups that are happening today.
Amazon/mcdonalds/ etc won’t be affected.
One thing that was missed in the article is that by making credit cards less profitable for the issuers, Gary won’t be able to give us free articles like this, subsidized by the Strata stories.
@Elaz: Oops! I thought Gary was wearing a romper suit, but you have just given us a whole new perspective on his wardrobe!
“The IRS et. al. would simply choose audit targets based on the size of their cash discounts.”
Sarcasm, my favorite type of comedy.
In New Zealand, one normally pays a debit/credit card surcharge. It is legally restricted to their out-of-pocket costs. However, by May, firms will be able to charge in-house customers 0.2% (domestic debit) and 0.3% (domestic credit), with 0.4% added if foreign. So, worst case is 0.7%. The seller eats the rest. They wondered why I didn’t complain as an American. Apparently many do, as they are not used to it. I pointed out that, since my drinks were at an establishment that was listed as a restaurant, I got 3% cash back after paying the 2% fee. I was still netting more than 1%.
Making economic policy is tricky. Such things are ripe with unintended consequences. You need smart people who have string backgrounds in economics, and then it is dangerous. Needless to say, few members of congress even approach solid economic literacy. And, Trump, is highly unqualified. It doesn’t make a difference, anyway. Trump is push 10% interest rates and swipe fees are a populist attempt to convince consumers and small businesses (swipe fees) to vote his way. Avoid a third impeachment and have a rubber stamp to build his legacy.
You’ve written lots of AI generated posts. But this one takes the cake. The bolded statements give it away. More like the “thought AI prompter”
Trump=no core political beliefs
He’s a populist, nothing more, a lot less.
Matt, I literally bolded each one manually which I decided to do rather than using bullets for the different arguments! This isn’t AI (though I’ve been accused of *being* an AI, long before AI was cool or un-cool as the case may be)
Democrats try to ruin everything, and Dick Durbin is a good example of using this act to pimp out his populist efforts to get re-elected. The Subaru driving pearl clutching liberals being upset that ATM’s charge money or banks earn fees through credit cards caused his handlers to give him this idea in the first place. Win re-election. Trump has been given bad advice on this one, I think. I’d rather see him push to the limit interest rates on student loans, something close to 0% would do. It would help free up spending and help people get out of heavy education debt much faster.
If swipe fees are so good, shouldn’t they be doubled?
Tripled?
Of course not, because this simple exercise exposes that these arguments are hogwash
Apart from slashing rewards, literally nothing you list about has happened in Europe. You have Americans paying 1.75% interchange whilst Europeans pay 0.3%. It’s a scam to keep prices high along with all those other weird US ones (you pay 1% to a real estate broker in the UK – bit more in London – because it is unregulated and anyone can do it, and thousands do).
Airline mileage and hotel awards have been devalued so much they are worthless. I now only have cash back cards and are a free agent when traveling.
Felon47 has never been on the side of the consumers or the people. He has no interest in “America” He is all about his personal benefit and the ultra rich.
@ DaninMCI — Dick Durbin isn’t running for re-election.
Let’s not kid ourselves, the outrageous level of swipe fees is a transfer from the poor to the rich. Is the ability to accept credit cards good for business? Yes. Do the fees need to be so high? No. Will an adjustment in fees save business money st the expense of consumers in the long run? Probably not. Supply and demand sets prices, not swipe fees.
Credit cards were working great for both sides before everyone got too greedy.
@ Gary — You’re AI, and Al Gore invented the internet.
@ ted poco — Mileage and hotel awards are worth less, not worthless.
I’d like to see the greedy airlines and hotel chains lose out on credit card revenue. They’ve been systematically sabotaging rewards to their benefit. Let there be 10% cap, less cc consumers and let karma have at them
Gary has Frequent Flyer Rewards Derangement Syndrome. Do not even threaten to threaten his rewards or he will completely lose his mind, as evidenced by the rest of this article.
Ultimately, merchants benefit from card swipe fees. It means more transactions, and higher average transaction price.
===
That is not true.
A one man plumbing company doesn’t get more work from a homeowner because he takes credit cards. Instead of replacing a leaky toilet, the homeowner doesn’t say “you accept credit cards? change 2 toilets, instead!!!”
A doctor’s office accepting credit cards for a copay doesn’t result in the patient saying “take out my appendix in addition to the office visit because you accept credit cards!”
Reward cards should carry no extra charge for the merchant compared to debit or non-rewards cards. The consumer and the credit card company should foot the bill. Or the Federal Reserve Bank should introduce it’s own no-fee, low fee to merchants card.
If it makes Amex more widely accepted it’s a good thing. I would really like to see legislation that prevents merchants or institutions charging fees to customers. If they want to recoup costs, include it in the displayed price.
All – remember with the recent MC and Visa settlement (think it is still awaiting final approval before implementing) merchants can refuse certain categories of MC or Visa cards (or charge a higher transaction fee for them). This means the higher “earning” award cards may be restricted or cost more to use. If you don’t believe me just google the settlement and read for yourself.
I would feel better having the mean kid from Toy Story as president.
Kevin Hassett, Director of the National Economic Council, on Trump’s 10% cap on credit card interest rates (January 16): “Our expectation is that it won’t necessarily require legislation because there will be great new Trump cards provided voluntarily by the banks.”
“You’ve written lots of AI generated posts. But this one takes the cake.” One can post AI generated content (I’m pretty sure Gary doesn’t). But how does one WRITE an AI-generated post?
“If swipe fees are so good, shouldn’t they be doubled?
Tripled?
Of course not, because this simple exercise exposes that these arguments are hogwash”
Wow, there is so much wrong with that “logic.” Replace swipe fees with “18.4 cent federal per gallon gas tax” or “X amount of Vitamin Y” or “2,000 calories a day” or “6 months in jail for shoplifting” or “sleeping 8 hours per day.” Many real-world scenarios have interior solution: the optimum is neither zero or one. If you can uses your “logic,” whe can argue against most everything. A 35% marginal tax bracket. If that’s good, why not double or triple?
“Company doesn’t get more work from a homeowner because he takes credit cards. Instead of replacing a leaky toilet, the homeowner doesn’t say “you accept credit cards? change 2 toilets, instead!!!”
A doctor’s office accepting credit cards for a copay doesn’t result in the patient saying ‘take out my appendix in addition to the office visit because you accept credit cards!'”
The real drivers of the CCCA are not doctors or plumbers, but big-box retailers. To them, credit cards are pure gold because please don’t tell me they’re NOT benefiting from shoppers being able to finance $$$ purchases on the spot rather than pass crumpled bills with their slobbery fingers.
Plus they settled a 20-year-old case a few years ago. The result is your plumbers, doctors and grocers are adding 4% surcharges like there is no tomorrow. In New York it’s become a universal sport. Small business owners here don’t mind swipe fees anymore.
Gary’s right. Big retailers who simply wouldn’t dare hit their customers with surcharges will be the only winners of the CCCA. Not consumers who’ll lose badly, gamers or not.
@ted poco
So, why do governments consider bills to force businesses to take cash? Isn’t that pretty solid evidence that many businesses would rather not take cash and certainly won’t discount for it. Of course they want lower swipe fees, but they aren’t interested in taking cash to avoid them.