Consumers will lose from IC card regulations

Reprinted from DC Journal

Politicians and a coalition of powerful retail giants pay bills designed to reduce the fees companies pay when a customer buys things with a credit or debit card.

Bipartisan Senate Amendment No. 6,201 would require cards to allow companies to route payments through networks that are not affiliated with Visa or Mastercard — the nation’s two largest card issuers — and would force issuers to make all payment networks available to retailers to route transactions, regardless of which network a customer wants.

Supporters of the amendment argue that it would undermine Visa and Mastercard’s grip on the card sector, where they collectively hold 80 percent of the market share while providing some inflation relief for consumers by lowering transaction costs that companies typically pass on to them.

But the reality is darker. The amendment does not refer to consumers, and there is no guarantee that we will encounter lower prices in-store or online. Instead, consumers will lose out because of fewer options, less access to credit, less secure transactions, and the evaporation of rewards programs and other benefits.

The card exchange fee is usually only 1 percent to 3 percent of the final price, even when passed on to consumers. Previous restrictions, such as the 2010 debit card exchange fee cap, have not even resulted in cost savings for most companies. Small businesses have often seen their costs increase. Only a few major retailers have seen costs drop. And 22 percent of retailers increased prices charged to consumers, while 1 percent cut prices.

The lack of significant benefits perceived for most retailers could partly explain why Australia, where financial institutions have allowed merchants to choose the least expensive payment networks to route customer transactions since 2018, has seen low acceptance rates for this job.

Moreover, interchange fees help pay for various services, including bonus programs, interest-free periods, and payment guarantees, so that merchants don’t have to worry about a customer’s credit history, security protocols, and other banking services. Forcing card issuers to lower the fees they can charge means lowering these benefits and programs — reducing consumer choice while deterring fraud protection and cybersecurity innovation.

It is not only the wealthy who rely on these benefits. Eighty-six percent of credit card holders have active rewards cards, including 77 percent of household income under $50,000.

Australia’s interchange fee restrictions of 2003 resulted in fewer services, lower interest and higher annual fees. Americans could soon feel similar pain.

Cardholders are also likely to incur at least some of the estimated $5 billion cost of the technical infrastructure needed for issuers to comply with the amendment. Banks have also responded to earlier exchange fee restrictions by filing a claim that Americans are charged fees for opening and using checking accounts, with fewer banks offering accounts without fees.

Low-income Americans can be severely affected by reduced access to credit. Credit unions that serve bank-deficient communities are already expressing concerns about the policy. Credit unions and community-owned banks also rely more on exchange fees to stay afloat than large banks, which rely more on interest rates. Low exchange fees may force these institutions to raise credit card interest rates, even though they serve a higher percentage of cardholders who are unbalanced or do not pay fines.

Congress can provide long-term inflation and cost-of-living relief by eliminating costly, counterproductive, special-interest regulations paid at the expense of ordinary Americans.

This makes more sense than regulating a misguided payment system that would reduce options, interest, and payment security for cardholders while pressuring banks and credit unions to raise interest rates and fees.

Satya Murar

Satya Marar is a Washington, DC-based policy attorney and Australia-trained attorney.

He was previously the Policy Director of the Australian Taxpayers Alliance, the largest taxpayer advocacy group in that country. He has also worked at the Washington-based Reason Foundation and the Center for Independent Study in Sydney.

He holds a Bachelor of Arts and Bachelor of Laws honors degree from Macquarie University, and is currently pursuing a master’s degree in Economics from George Mason University.

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