Senate Judiciary Tees Up More Price Control Pain

Pervasive misinformation and disinformation have the attention of lawmakers. Unreliable information causes harms and policymakers are right to explore options available to mitigate this problem in ways that are consistent with the Constitution’s stringent protections for speech. Lawmakers should not engage in policymaking that introduces misinformation into the marketplace. Sadly, that’s what the Senate Judiciary’s May 4^th Hearing on Excessive Swipe Fees and Barriers to Competition in the Credit and Debit Card Systems looks to be all about.

The misinformation in this instance comes in the form of potential price controls on interchange (processing) fees for credit cards. Price controls, wherever and whenever they are introduced, are forms of economic misinformation. Those who advocate for price controls usually fail to understand that prices are nothing more than information or signals. Simply changing what price is allowed to be charged sends false signals to producers and consumers alike about the conditions of the market, resulting in harms.

Price controls similarly do nothing to address the underlying factors influencing a price. The effect is like damming a river without addressing where the water will flow next. Costs are shifted and incurred by consumers and producers in many unpredictable ways. In the case of limiting interchange fees for credit cards, the implementation of similar caps on debit card transactions offers clear insight.

Senate Judiciary Chairman Senator Richard Durbin (D-Illinois) offered an amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act that imposed caps on fees charged to retailers and other merchants to utilize debit card networks. The thought behind Durbin’s amendment was that limits on fees charged to merchants would be passed on to consumers through lower prices for goods and services. In the end, costs were simply shifted from merchants to financial institutions, with financial institutions then extracting increased costs from their customers. Financial institutions began reducing the availability of free checking accounts and increased fees associated with accounts, disproportionately harming lower income consumers.

In addition, increased costs on financial institutions constrains the ability for these institutions, particularly community banks and credit unions, to offer credit. These institutions provide many small business loans, meaning that Durbin’s amendment harmed the ability for smaller merchants to enter the market and compete with larger firms with easier access to credit. Effectively, the amendment has become a subsidy for the largest retailers and other merchants at the expense of financial institutions, small businesses, and consumers.

Caps on interchange fees associated with credit card transactions will have predictable impacts based on the results of the Durbin’s amendment. Credit card-issuing banks will see constraints on their ability to offer credit in the first place in the face of higher costs. The most obvious cost to the customers of financial institutions will come from dramatically reduced or eliminated rewards programs associated with their credit cards. Research conducted by the Federal Reserve found that about half of all rewards programs associated with debit cards were eliminated following the passage of the amendment. Applying similar price controls to credit cards will result in reduced rewards offerings for consumers. This means less cash back, fewer airline miles, lower gas rewards, etc., all at a time when consumers are battling significant inflation.

Price controls distort markets by introducing economic misinformation into the system. Just because card processing fees go on behind the scenes to most consumers does not mean they are immune to this reality or that the harms caused by the distortions will remain behind the scenes as well. As the Durbin’s amendment has proved, consumers and small businesses will also bear the brunt of any attempt to distort prices in the credit card sector.