ICLE White Paper – Price Controls on Payment Card Interchange Fees: The US Experience

ICLE has released a new study on the effect of payment card interchange fees on consumers, retailers and banks by Todd Zywicki, Geoffrey Manne and Julian Morris, titled: Price Controls on Payment Card Interchange Fees: The US Experience

Payment cards are frequently safer, quicker, and more convenient than cash or checks. But, according to the new study, interchange fee caps under the Durbin Amendment to the Dodd-Frank financial regulatory reforms have made electronic payments more expensive for consumers. While debit interchange fees charged by regulated banks (those with assets of over $10 billion) in the US fell by about 50% following the regulation, consumers, as well as smaller retailers, have not benefited from the cost reductions — and poorer consumers, especially, have been significantly harmed.

Interchange fee price control proponents claim that reducing these fees reduces costs paid by merchants, who pass the savings on to consumers. But the US experience detailed in the study suggests that, while most large retailers have experienced savings, to date there is no evidence that those savings have been passed-through to consumers.. Meanwhile, smaller merchants haven’t seen any appreciable savings to begin with, and both small and large merchants alike that engage in small-ticket transactions have actually seen costs go up.

At the same time, the costs of operating the payment system have to be recovered somehow “ which has meant an increase in other bank and card charges. In order to make up the estimated $8 billion per year lost as a result of the price controls, regulated banks:

  • Reduced the availability of fee-free checking accounts by 50% between 2009 and 2013.
  • More than doubled the minimum monthly holding required on fee-free checking accounts.
  • Doubled average monthly fees on (non-free) checking accounts.

These changes contributed to a 10% increase in the number of “unbanked” — people without bank accounts.

Thus, while consumers have seen large and immediate increases in the cost of bank accounts, to date there is no evidence of reduced prices at the pump or checkout. The study estimates that as a result of the Durbin Amendment, there will be a net transfer of between $1 billion and $3 billion annually from consumers — especially in low-income households — to large retailers and their shareholders, who have thus far been the primary beneficiaries of the Durbin Amendment.

As the EU considers its own interchange regulation, the US experience should stand as a cautionary tale.

The study is available here:

Price Controls on Payment Card Interchange Fees: The US Experience by Geoffrey A. Manne, Julian Morris & Todd J. Zywicki [updated 5 June 2014 to include abstract]