In the last four years both Congress and the Biden Administration tried to limit the interchange fees associated with credit cards in the name of protecting consumers. However, recent research suggests that such actions result in low-income households finding it more difficult to obtain credit, and the cost savings to those consumers who could keep their credit cards being almost non-existent.
Chris Richardson, an economist who had previously worked for the FDIC, recently published a study that examined debit card data after Congress imposed a cap on debit card interchange fees in the Dodd--Frank bill, which took effect in 2011, for banks with more than $10 billion in assets. The legislation also mandated that debit card issuers make it possible to route transactions through two different entities. That there were two distinct groups of banks--those covered by price controls and those exempt--made it straightforward to measure their impact.
Richardson found that these regulations made debit cards somewhat akin to utilities, and the caps meant that covered banks could only make a slim profit on their issuance. As a result, those banks curtailed their efforts to encourage their usage--rewards programs associated with debit cards essentially disappeared--and they reduced their offerings of debit cards, primarily to marginalized consumers.
Richardson’s research suggests that much of the profits banks made from debit cards went to subsidizing the other benefits people received from having a bank account, such as free checking, low minimum balances, and the like. Once it became impossible to make money on debit cards, their enthusiasm to service them--and the people who relied on them--waned, and millions of households lost access to basic financial services.
Richardson suggests that efforts to cap interchange fees for credit cards would result in a similar diminution of usage. For instance, he examines research on Spain’s efforts to cut interchange fees, which increased the number of retailers that accepted credit cards but concomitantly imposed higher fees for cardholders as well.
His research found that a one percent increase in aggregate interchange income is associated with a 0.94 percent increase in new account growth. The inverse is true as well: A significant cut in interchange revenue would reduce access to credit. Proponents of the Credit Card Competition Act claim it would cut fees by $16 billion; Richardson’s research notes more than 2.5 million people would lose access to credit as a result.
Richardson’s study also finds that efforts to change the status quo for payment routing would do little to benefit cardholders, and there is no evidence that these savings would be passed to consumers. What’s more, the preference for the least-cost processor would reduce incentives to spend money on fraud prevention, since there’s no reason for retailers to consider that when making their routing decision. As a result, investments in fraud prevention technology would fall, and fraud--which increased significantly when the Dodd--Frank Act capped debit card fees--would increase.
The credit card market is far from intuitive, and facile regulations ostensibly designed to benefit cardholders would almost invariably fail to achieve their intended mission. Payment networks sit between retailers and consumers and exist in what is a two-sided market, which suggests that government interventions are more likely to have unintended consequences.
The Biden Administration often derided credit card companies and the banks that issue them as being little more than “middlemen,” which they suggested--pejoratively--meant that they extracted revenue without providing anything of value.
But nothing could be further from the truth. The ability of consumers to travel literally anywhere in the world, easily conduct transactions without any cash, and have access to credit is a remarkable convenience. Creating such massive networks of retailers amounts to a complicated and costly undertaking, and we are all better off for it.
Attempts by governments to interdict this market with interchange fee caps or routing mandates invariably reduce access to credit for those who need it the most while doing little to reduce costs for those customers who manage to keep their credit cards.
It is a bad solution in search of a problem.
