ICLE White Paper Highlights the Problems of Payment-Network Price Controls
PORTLAND, Ore. (March 4, 2022) — A new white paper from the International Center for Law & Economics (ICLE) reviews the relevant academic literature on payment-card interchange fees, finding that price controls imposed by several jurisdictions in recent years have done more harm than good.
While intended to benefit lower-income consumers, the paper finds that interchange-fee caps like the Durbin amendment have mainly benefited shareholders in Big Box retailers, while harming most consumers, especially those with lower incomes.
The authors—ICLE Academic Affiliate Todd Zywicki, Senior Scholar Julian Morris, and President Geoffrey A. Manne—examined the effects of interchange-fee caps in Australia, Spain, the United States, and the European Union. In each case examined, interchange-fee caps reduced revenue to card issuers, who responded by raising other fees, such as bank account fees, annual card fees, and interest rates, while reducing card benefits like rewards and insurance.
Surveys show that merchants in Spain and Australia do not appear to have passed through much, if any, of their savings from lower interchange fees to consumers. U.S. merchants passed through at most 28% of their savings, while banks passed on 42% of their losses in the form of higher charges. EU merchants likewise passed through only 30% of the reduction in interchange fees, but EU banks recouped essentially all their losses through other fee hikes.
Moreover, the literature finds that, where possible, consumers shifted to cards that were not subject to interchange-fee caps. In Australia and the United States, these tended to be consumers with better credit scores and/or higher incomes. Consumers with poor credit scores, especially those with lower incomes, fared very poorly. In the United States, many appear to have exited the banking system altogether, rather than pay higher bank fees.
“Overall, it is clear that imposing price caps on interchange fees has had many pernicious effects and that, in contrast to the claims of those who support them, they have done far more harm than good,” the authors write.