The pandemic has accelerated e-commerce and remote-work availability. But Congressional Democrats are interested in pulling consumers back a decade and expanding Dodd-Frank era price controls to credit cards.
Consumers have adapted their spending habits in an increasingly mobile and remote economy. Savings rates have hit their highest level since 1975 while consumers continue to increase their shift to online spending.
Federal Reserve analysis shows that Americans have deposited $3 trillion in American banks and slashed their credit card debt by 14%. Consumers have shown their preference for debit and credit cards rather than paying for goods and services with cash. But some retailers wish to further limit consumers preference for debit and credit cards, and Democrats in Washington are eager to impose the Durbin Amendment — price controls — on credit cards.
A recent Wall Street Journal article criticized payment companies for charging merchants interchange fees when processing a consumer’s transaction. Even though these fees help cover the cost of securing consumers’ transactions and find $50 billion in consumer rewards, some retailers dismiss the effectiveness interchange fees play in securing purchases at check out. In 2020, payment companies helped their 10.7 million domestic merchants continue to record transactions safely when handling cash seemed less desirable by consumers.
Interchange fees are charged at the point of sale by banks and credit unions on debit and credit card transactions. These fees address fraud, mitigate the risk of nonpayment by cardholders, and offer low-cost credit card services and rewards to their customers. Interchange fees also provide tangible benefits to consumers, ensuring secure transactions, providing zero fraud liability for cardholders, and bolstering popular credit rewards programs. But Senator Dick Durbin (D-Ill.) consistently insists that Washington knows best on how consumers should choose to allocate their capital.
The retail industry has lobbied against interchange fees for decades. In 2010, Democrat Senator Durbin pushed through the Durbin Amendment, an eleventh-hour provision included in the Dodd-Frank Act, which instructed the Federal Reserve to place a cap on debit-card interchange fees.
Large big-box retailers have persisted that lower interchange fees will benefit consumers with lower prices of items in stores. However, a 2017 report published by the International Center for Law and Economics shows that after restricting interchange fees on debit cards, large retailers saved approximately $40 billion while passing no meaningful savings on to consumers. Additional research from the Federal Reserve echoed these findings: no benefits for consumers.
Sadly, the Durbin Amendment increased the costs of financial services to consumers as banks had to compensate for $90 billion in lost revenue, resulting in higher overdraft fees, increasing minimum balances, reducing access to free checking, and rolling back debit card rewards programs. The adverse effects of these policies have fallen hardest on the unbanked and underbanked, who need access to affordable financial products and services the most.
Over the past decade, consumers have shifted their preferences to the ease of use of debit and credit cards over cash. Driven by generous rewards programs and advances in payment technology, credit cards have become the payment method of choice in the American wallet, overtaking cash and debit cards in the last decade. This trend has continued throughout the pandemic as new credit card technologies facilitated safe and contactless transactions and supported the surge in online shopping.
But this positive trend in consumer preference and choice is under threat as Democrats continue to entertain calls to expand the Durbin Amendment to credit cards.
If payment providers cannot price their interchange fees competitively, freely, and fairly, billions in credit card rewards will be rolled back, a program consumers’ greatly value with limited savings passed on to consumers as promised.
Americans for Tax Reform urged members of the Senate Banking Committee and House Financial Services Committee to continue to oppose Democrats' efforts to expand the Durbin Amendment. Large retail chains will press this issue and ask Washington to insert themselves between consumers and their spending preferences. Republicans must remain united in opposing further government intervention in the marketplace.
Dan Kim is a Federal Affairs Associate with Americans for Tax Reform.