An opinion column in today’s WSJ highlights some of the logical flaws in the so-called Credit Card Competition Act of 2023, which proposes price controls on credit card interchange fees. The article brings to light some of the assurances of the CARD Act of 2009 and Dodd-Frank, which promised to return the savings back to consumers. Instead of reducing costs, it appears that debit card savings went into the pockets of top retailers.
- The aim was to reduce interchange fees paid to the card-issuing bank to cover the costs of authorizing and processing customers’ accounts and transactions.
- The intervention succeeded, slashing the cost per transaction from 51 cents to 24 cents and costing banks an estimated $15 billion a year in lost revenue. In return, retailers promised to pass on the savings to customers through lower prices.
- Yet research from the Federal Reserve, the Richmond Federal Reserve Bank, the University of Pennsylvania, and elsewhere found otherwise: Retailers pocketed the savings.
In short, price controls robbed banks of their scheduled profits under the guise of reducing consumer costs. Instead of reducing costs, merchants retained the funds for their own net revenue.
The Double Whammy
Not only did consumers miss out on the promises of reduced costs, but they also ended up paying higher prices for other banking services.
- Using 2016 data, economists Vladimir Mukharlyamov and Natasha Sarin estimated the effects of the original Durbin amendment.
- They found that the legislation reduced customer access to free checking from 61% of bank accounts to 28% and almost doubled banks’ average fees to account holders from $3.07 a month to $5.92.
- The minimum balance needed for free checking increased to $1,400 a month—a threshold 95% of high-income households could meet, but only 30% of low-income households could.
If You Are Keeping Score, Banks Lose, Consumers Lose, and Retailers Win
Back in 2006, a similar regulatory event happened in Australia. The Reserve Bank of Australia imposed credit card price controls, with the same noble intention of reducing consumer costs. The savings got lost on retailer profit lines. Banks lost the revenue, and consumers never saw a penny.
Note the theme is similar in this three-card-shuffle. Come up with a good-sounding title, like Credit Card Competition Act. Promise that consumers will see the benefits. Use the power of law to drive down credit card pricing. Then let the retailer hold onto the funds promised to the consumer.
Timing is Poor
The typical economist is not certain if we are in a recession or about to be. Banks expect hard times, and their loan loss reserves under CECL are protecting against a downstream issue. This is not the best time in history to force banks to tighten their lending functions, as the economy struggles and hopes to land flat, at best. You can read how financial industry associations are calling “foul” to legislation that benefits Walmart and Target, more than the American Consumer, in a joint note by the American Bankers Association, the Bank Policy Institute, the Consumer Bankers Association, the Credit Union National Association, the Electronic Payments Coalition, the Independent Community Bankers of America, the Mid-Size Bank Coalition of America, and the National Association of Federally Insured Credit Unions here.
Overview by Brian Riley, Director of Credit /Co-Head of Payments at Javelin Strategy & Research.