The popularity of COVID relief has provided an excuse for Congress to pass items with tenuous connections, at best, to the pandemic, but that have long populated liberal wish lists. Even after the passage of the $1.9 trillion so-called stimulus, the trend is likely to continue. To the detriment of consumers, an expansion of debit card price controls to include credit cards may be next up on the list.
Over 10 years ago, the Dodd-Frank Wall Street Reform and Consumer Protection Act included the Durbin Amendment, which set a cap on the “swipe fees” retailers pay when a debit card is used in their stores. Looking back, we now have ample evidence to show that the caps have done what price controls always do: Backfired and harmed consumers.
Politicians and merchant lobbying groups promised big savings to consumers, but they failed to materialize. The Federal Reserve Bank of Richmond found few merchants lowered prices in response. On the other side, card issuers reduced consumer benefits like free checking accounts, offering them 35 percent less often according to another Fed study, and other rewards programs. A study from George Mason University economists further estimates as many as 1 million mostly low-income people lost financial access altogether, adding to the problem of the “unbanked.”
As is typical, politicians learned nothing from this experience.
Sen. Dick Durbin (D-Ill.) is leading the charge to expand the scope of his ill-conceived amendment to include all credit cards. At a recent Congressional hearing, he accused Visa and Mastercard of “waiting for an opportunity to get even again” because of losses incurred from his debit card price controls, and of setting rates “far in excess of any reasonable measure of cost.”
This is a different tune than the one he sang when originally pushing his Durbin Amendment. At the time, he argued credit cards contrasted with debit cards “because the credit card company is creating this means of payment. It is also running the risk of default and collection, where someone does not pay off their credit card. So, the fee is understandable because there is risk associated with it.”
There are many problems with Durbin’s statements. For instance, it is not a proper exercise of government power to second guess whether any fee or charge is “reasonable.” Even the smartest among us, which typically does not include politicians, cannot possibly process and evaluate the countless variables that determine prices in competitive markets, and it is counterproductive to attempt to do so.
Perhaps more importantly, the revelation that the Durbin Amendment was a mere camel’s nose under the tent should give pause to anyone considering his arguments today. What other principle might he toss aside in the years ahead to expand his power and influence even further over the market?
If Durbin is so convinced interchange fees are unreasonable—presuming, as he must, that consumers are not receiving sufficient value for the investment in fraud prevention and innovation that the fees facilitate—then he should start his own company and charge lower rates. Barring that, his judgment should not be given any serious weight.
The Durbin Amendment did not protect consumers. Its expansion certainly will not, either. Repeal, don’t replace.