Swipe Fee Cap Distorts the Marketplace

September 18, 2015, 9:30 a.m. EDT 2 Min Read

Law and regulation

How the Fed Failed the U.S. on Swipe Fees

A new study by the Richmond Fed confirms that swipe fees have only gone down for a small fraction of merchants, contrary to congressional intent. This finding should spur the central bank to limit price-fixing to a reasonable level.

September 1
Law and regulation

Swipe Fee Cap Would Come at a Cost to Data Security

Merchants argue that Fed policy allows banks to overcharge stores for debit-card swipe fees, resulting in higher prices for consumers. But the revenue banks earn on interchange fees benefits all Americans, since financial institutions invest a portion of it in developing security technologies to protect consumer data.

April 9
The Many Fronts of the Swipe Fee Battle
Law and regulation

Apple Pay May Reignite War Over Durbin Amendment

Merchants are making a new argument in their years-long battle with banks over swipe fees, saying Apple Pay has locked them out of additional routing options mandated by Dodd-Frank.

By Joe Adler

April 6

The more things change, the more they stay the same.

The National Association of Convenience Stores’ latest op-ed on debit-card interchange fees is the most recent in the organization’s years-long effort to obtain government-mandated price controls. But such controls would only increase large retailers’ profits.

Consider the facts. The new Richmond Federal Reserve study finds that of the retailers that have experienced interchange reductions, few reduced the prices of their products and passed the savings on to consumers. Clearly, price caps have thus far failed to help customers at the cash register.

Consumers have also paid an additional price as a result of price controls. The Durbin Amendment has made it much more difficult for banks to offer free or low-cost checking accounts. Many banks previously depended on interchange revenue to support these types of accounts, which otherwise lose money for most institutions. When that revenue was cut, it became much more difficult to offer the same account services.

In fact, a George Mason University School of Law study found that since the Durbin Amendment took effect, more than 1 million people, mostly low-income families, have seen those accounts disappear or faced higher costs and new restrictions to using them. This translates into an annual transfer of between $1 billion and $3 billion from low-income households to the large retailers that have benefited from the fee cap, all because of price controls.

The fact is that price controls come with unintended consequences that arbitrarily create winners and losers in the marketplace. The Richmond study points out that sellers of “big-ticket” items saw their interchange costs on those items go down after the rule change, while sellers of small-dollar products saw their costs on those items go up. That’s a direct — and unintended — consequence of the government’s attempts to micromanage marketplace pricing. Market forces react to such arbitrary price controls in unforeseen ways.

Government shouldn't be in the business of dictating pricing on private-sector products and services, plain and simple. And the retail lobby shouldn't be in the business of recommending that the government intervene further. We highly doubt that any retailer would want price controls on the products that line their shelves.

The Durbin Amendment illustrates the negative consequences for consumers when policymakers choose winners and losers and distort the marketplace. Fixing the problem with more price controls is no solution.

Frank Keating, former Republican governor of Oklahoma,
is president and CEO of the American Bankers Association.