Senators Dick Durbin (D-IL) and Roger Marshall (R-KS) are expected to introduce a bill to limit credit card interchange fees. If enacted it would be a huge win for merchants, who love taking credit cards – since it means higher sales volumes at a lower cost than accepting cash – but would prefer not to pay for the privileges.
This is usually couched, by lobbyists for big retailers, as benefiting consumers. However prices haven’t fallen anywhere that interchange has been limited, such as in Europe and Australia. In fact, in Australia the government followed up price caps on interchange with price caps on the credit card acceptance fees that merchants could charge to consumers, because those pushed prices up.
This would effectively eliminate credit card rewards as we know it. Credit cards aren’t nearly the source of perks and points in Europe, where interchange is capped, as they are in the U.S. But it has zero chance of passing at this time,
- This is a mid-term election year. Controversial legislation isn’t moving.
- It won’t have Republican support to reach 60 votes in the Senate, and can’t be passed through reconciliation.
- While it has a House sponsor in Representative Peter Welch (D-VT), Democrats are likely to lose the House this fall.
- President Biden was Senator from Delaware, representing banks and card issuers. This isn’t going to be high on the President’s agenda.
Dick Durbin previously stuck a provision into the Dodd Frank financial reform act 12 years ago that effectively made profiting from debit card transactions illegal, capping debit interchange at 21 cents plus 1/20th of one percent of each transaction. The result was that offering free checking accounts were no longer profitable for many banks (since they no longer generated fees for debit payments from those accounts). This made bank accounts more expensive for many and increased the number of unbanked.
Ultimately credit card processing fees are likely to fall.
- Big merchants have been negotiating lower fees. Amazon just reached a new, less costly deal with Visa. Costco pays next to nothing for credit card processing in a Visa deal.
- New technology will drive down cost. So far blockchain technology is more expensive to process transactions, but to the extent that credit card networks earn outsized profits for the service they provide, and technology costs fall, new players will compete down the cost of interchange.
Lower margins processing transactions means it’ll make sense to spend less incentivizing transactions through the channel, and thus make sense to offer fewer or less lucrative rewards. Debit card rewards – where debit transactions are subject to Durbin amendment caps – are almost non-existent. Some financial institutions, though, have found ways to circumvent debit interchange limits.
Incidentally, it would mean the end to outsized profitability for frequent flyer programs – and the ability for airlines to mortgage those frequent flyer programs for tens of billions of dollars. The value of outstanding loyalty program debt at American, Delta and United would plummet. Delta’s CEO says the federal government has shown it will always be there to subsidized airlines when needed. Eliminating the most valuable asset owned by large airlines creates the much more likely condition for future taxpayer bailouts.
It’s important to note that:
- Merchants benefit from credit cards. People who spend with card spend more, and the cost of processing credit cards is far cheaper than cash because employees pocket cash, they make incorrect change, having large amounts of cash drives up insurance costs and it attracts outside theft.
- Consumers don’t benefit from interchange caps. Where caps have been implemented prices haven’t fallen. They didn’t fall in Europe and Australia, and they didn’t fall in the U.S. after rates on debit transactions were capped. But consumers benefit, not just from rewards, but from the protections offered by credit cards including fraud protections, and on cards offering these benefits from price protection, extended warranty, and repair coverages. International experience suggests that capping interchange leads to higher fees on consumer cards in any case.
- Rewards aren’t primarily for the rich, and don’t come at the expense of the poor. The idea that the ‘rich’ and ‘poor’ are buying the same things at the same store (necessary for the claim that higher prices are the result of higher interchange on rewards cards) doesn’t reflect actual store and consumer experience. Studies suggest merchants aren’t passing all of interchange onto the consumer anyway, it’s a cost of their business. Lower-income consumers frequently have rewards cards! It’s credit score rather than income that correlates with rewards card usage, and wealthier consumers in the general population may pay less attention to the margins at which they can benefit from card rewards.
While this isn’t going to happen today, you don’t want to push the button on Dick Durbin’s pet cause tomorrow either.