The federal government’s distortion of the payment transaction market has raised costs and reduced revenues for banks and credit unions while providing no benefits to consumers. If Congress or the Biden administration further encroaches on this market via legislation or executive action, consumers will continue to see fees go up on deposits, and banks, credit unions, and payment card networks will lose more revenue and be forced to reduce services to consumers.
The data from the Federal Reserve clearly shows that no government mandate is necessary to keep fees steady--market forces are already doing this.
Interchange fees on credit cards, or swipe fees paid to a bank or credit union for the card payment services provided to a retailer, have remained constant over the last decade. The Federal Reserve released a report in August 2021 that shows the rate of an interchange fee on a $40 transaction using a credit card in various types of industries. Fees charged by Visa, Mastercard, and Discover have largely remained the same over the past decade. This is purely determined by market forces because there is no government mandated price cap on interchange fees for credit cards.
Since 2007, interchange fees charged on transactions at gas stations and small retailers have remained constant. Since 2012, fees for e-commerce have remained steady as well.
Small banks and credit unions are seeing higher authorization, clearance, and settlement (ACS) costs compared to larger depository institutions. The Federal Reserve’s report on 2019 interchange fees states that “the cost for low-volume issuers ($0.711) was more than 20 times higher than the cost for high-volume issuers.”
These are not the only costs these banks and credit unions must pay. In the report’s footnotes, the Federal Reserve admits that it instructed banks and credit unions to exclude “costs related to corporate overhead, account relationships, rewards programs, nonsufficient-funds handling, nonsufficient-funds losses, cardholder inquiries, card production and delivery.”
By not including these costs, the Federal Reserve is failing to consider the total expenses depository institutions face while it is simultaneously limiting the amount of revenue they can earn under the Durbin amendment’s interchange fee cap.
In 2020, the four largest U.S. banks earned less than 5 percent of their total net revenue from interchange fees. One of them, Citigroup, even lost money on interchange fees because the cost to supply rewards for customers was higher than the fees collected on consumer transactions.
Interchange fees are not a major windfall for banks.
Deposit fees increased because of lost revenue from the cap on debit card interchange fees. The Federal Reserve concluded in one study from 2014 that banks affected by the Durbin amendment increased their deposit fees, which includes overdraft fees, on consumers. According to the study, banks “increased deposit fees 3 to 5 percent in response to” the Federal Reserve’s Regulation II.
In 2017, the International Center for Law and Economics found that since the Federal Reserve implemented the Durbin amendment via Regulation II, low-income consumers were harmed by increased deposit fees. According to ICLE, “Low-income consumers are more affected by the bank account fees that arose after implementation of the Durbin Amendment because these fees represent a larger — and increasing — share of their incomes.” ICLE goes on to say that low-income consumers “are also more likely to incur these fees because, e.g., minimum balance requirements are now more stringent.”
Congress and the Biden administration wrongly claim that more scrutinization of the payment transaction ecosystem is necessary. Biden’s CFPB, FTC, and DOJ seem keen to root out “anticompetitive” behavior for a market that is already under intense government regulation.
Congress is also attempting to hamstring seamless and fraud-protected transactions. Senator Amy Klobuchar (D-Minn.) is leading legislation that could compromise payment transactions by inhibiting new and innovative payment processing technology consumers can use for buying goods and services.
The bill could be used as a trojan horse to significantly hamstring payment card networks in the United States. Under the bill, the Federal Trade Commission could force payment card networks to share their networks with competitors or even share proprietary security information to comply with the prohibition on “self-preferencing.” This is a surefire way to inhibit firms from investing in more secure and affordable payment technology that would benefit both consumers and retailers.
Expanded government intervention within the payment transaction market will increase costs on depository institutions while also raising certain fees for consumers and reducing services such as the availability of secure and seamless financial transactions.
Congress should think twice before pursuing additional actions that will further hurt consumers while inflation continues to rise to record highs and erode purchasing power.