ANNOUNCEMENT: ICLE Scholars Available to Discuss Swipe Fees and Payment-Card Competition

PORTLAND, Ore. (May 4, 2022) — As the Senate Judiciary Committee convenes a hearing this morning on the subject of swipe fees and competition in the credit- and debit-card markets, scholars with the International Center for Law & Economics (ICLE) caution lawmakers that capping interchange fees has done far more harm than good, transferred wealth from consumers to the shareholders of large merchants, and impeded competition, and that such caps should not be expanded.

Congress imposed price caps on interchange fees for debit cards issued by banks with more than $10 billion in assets in 2010, under an amendment to the Dodd-Frank Act introduced by current Judiciary Committee Chairman Richard Durbin (D-Ill.). While Durbin’s stated goal was to save consumers money at the checkout counter, a recent ICLE literature review details that, in practice, the caps have had the opposite effect. To offset lost revenue from interchange fees, banks increased account fees and other charges, passing through 42% of their losses. Meanwhile, merchants passed through, at most, 28% of the savings they realized from lower debit-card interchange fees.

“Poorer consumers were hit the hardest, because banks reduced the availability of free checking accounts and raised the minimum deposit amounts to qualify for free checking,” ICLE Senior Scholar Julian Morris said. “Many poorer customers appear to have left the banking system as a result.”

The Durbin amendment also introduced requirements prohibiting exclusivity arrangements among debit-card issuers and payment networks, on the premise that this would lead to competition in the routing of debit-card payments. But according to Morris, this has primarily affected community banks and credit unions, who have been forced to accept the lower interchange fees charged by some PIN debit networks. Credit unions alone have lost more than $6 billion in interchange-fee revenue, Morris notes, with many forced to increase other fees and/or reduce lending.

“Ironically, the Durbin Amendment also seems to have delayed entry by financial technology or ‘fintech’ companies. Since these companies are at the cutting edge of innovation, offering new products and reducing costs, it would appear that the Durbin amendment has actually hindered competition,” Morris said.

For more details on the economics of payment-card networks, see the ICLE white papers “The Effects of Price Controls on Payment-Card Interchange Fees: A Review and Update” and “Credit Cards and the Reverse Robin Hood Fallacy: Do Credit Card Rewards Really Steal from the Poor and Give to the Rich?” Journalists interested in interviewing Julian Morris or other ICLE scholars about the economics of payment-card networks should contact ICLE Editor-in-Chief R.J. Lehmann at [email protected] or 908-265-5272.