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%.
@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.