Chairman Hickenlooper, Ranking Member Blackburn, and Members of the Committee:

I am Todd Zywicki and it is a pleasure to appear before you today to testify on the topic of “Protecting Consumers from Junk Fees.” I am George Mason University Foundation Professor at Antonin Scalia Law School and Research Fellow of the Law & Economics Center. From 2020-2021 I served as the Chair of the CFPB’s Taskforce on Consumer Financial Law and from 2003-2004 I served as the Director of the Office of Policy Planning at the Federal Trade Commission. I am also co-author of Consumer Credit and the American Economy (Oxford 2014) and have written and spoken extensively on issues of consumer protection generally and consumer financial protection specifically. I appear voluntarily today in my personal capacity and do not speak on behalf or represent any other party.

I share the frustration that many consumers hold today regarding the proliferation of seemingly ubiquitous add-on fees that we experience constantly, from surcharges for using our credit cards at a merchant, to hotel “resort fees,” and others. And earlier this year I experienced exactly this frustration when I checked into a hotel on vacation and was assessed a mandatory $30 a day “resort fee” that was only disclosed in fine print on the last screen of a multi-page checkout process at an Internet hotel booking website.

Buying a ticket to concert has in fact become a tedious process of searching for a concert or sports ticket and then having to spend 10 minutes clicking through multiple pages before you can discover the real price and decide whether to go to the show.

So I also say, “Enough.”

But it is also important to stress that not all of these fees are “junk” fees. Many of these multi-part pricing schemes are economically efficient, in that they better match consumers with the product terms and attributes they value. Others are appropriate as means to protect some consumers from being forced to subsidize others’ choices or the higher costs that some consumers impose relative to others. For example, requiring upper-income jet-setters to pay foreign currency transaction fees hardly seems unfair to those who don’t travel abroad and presumably nobody has an issue with requiring payment of “add on” fees for additional toppings on a pizza. Requiring every vacation resort to be all-inclusive would force those who don’t drink alcohol to subsidize those who do. While some use of multi-part pricing today is likely welfare-reducing, multi-part pricing has become more frequent is because paying for the services you actually use over the long run can be more fair and efficient for other consumers, even if foreign travelers, partiers, and those who pay late on their credit cards might disagree.

As Howard Beales and I wrote recently:

The term “junk fees” defies easy definition. But it is imperative to distinguish ‘junk fees’ that are designed to extract rents and consumer surplus from consumers from efficient behavior-based fees. Welfare-reducing “junk” fees are most likely to emerge only under a relatively narrow set of market conditions — particularly those markets with few repeat customers where consumers are less likely to learn of the hidden fees, where consumers are effectively locked-in and unable to avoid paying the fee when it is imposed, or where such fees may be atypical and thus consumers are not alert to them.

The unraveling of the rule of law in finance is inherent in the system’s discretionary process of regulation. Each financial crisis begets new regulations and new regulatory agencies with more expansive and discretionary powers. The general entanglement of finance, leftist interest groups, and the federal regulatory apparatus has created a threat to freedom that is almost unique in history. Leftist activists, “woke” corporations, and regulators and politicians have recognized and acted on the opportunity to use the financial regulatory system both to enact preferred policies through anti-democratic means and to silence their ideological opponents. As governmental power grows, the threat of its misuse grows concomitantly.

ICLE Academic Affiliate Todd Zywicki joined Southwest Public Policy Institute President Patrick M. Brenner on SPPI’s SPPI-TV podcast to discuss interest rate caps and the role of the Consumer Financial Protection Bureau (CFPB). Video of the full episode is embedded below.

Abstract

The notion of “junk” fees is a fine piece of rhetoric, but useless as an analytical tool. Many fees identified as junk impose costs on consumers who generate those costs – rather than forcing others to subsidize their behavior. For example, credit card late fees deter late payments and their associated costs while only world travelers pay foreign currency transaction fees. There is no reason for ordinary consumers to subsidize either group. Because information is costly, consumers rationally focus on the elements of price that are most important in their own circumstances. Requirements to disclose everything everywhere will only interfere with this process. Both the structure of pricing, and the level of prices, should be determined by competition in the marketplace. As we observe, the result is detailed fee structures for some products and services, and bundled pricing for others. Attempts to regulate pricing structures by requiring itemized prices increased the costs of real estate settlements. Regulating components of credit card pricing structures led to increases in other fees and reductions in credit availability. Competition over pricing structures is far more likely to satisfy consumer preferences than an inevitably overbroad set of regulatory requirements

ICLE Academic Affiliate Todd Zywicki joined NAFCUtv, the news program distributed by the National Association of Federal Credit Unions, to discuss the history of the Dodd-Frank Act’s so-called “Durbin amendment,” which established interchange price caps, as well as the recent Credit Card Competition Act and an overview of the market for credit cards and consumer payments. The full video is embedded below.

Sens. Richard Durbin (D-Ill.) and Roger Marshall (R-Kan.) recently introduced the Credit Card Competition Act, which would effectively enable merchants to route credit card transactions over a network other than the main one affiliated with the card. The sponsors say that this will increase “competition” and reduce costs for merchants, who will pass on the savings to consumers.

But are Durbin and Marshall being overly optimistic? Have they perhaps missed some predictable but unintended consequences that might cause their act to harm rather than help consumers?

The International Center for Law & Economics hosted an Oct. 25, 2022, webinar panel to offer a timely discussion of the proposed legislation, moderated by ICLE Director of Innovation Policy Kristian Stout and featuring Senior Scholar Julian Morris and Academic Affiliate Todd Zywicki.

https://www.youtube.com/watch?v=ugcvlFwq2IU

The Dodd-Frank Act’s so-called “Durbin amendment,” passed more than a decade ago in 2010, was supposed to reduce the cost of consumer goods by regulating the price and processing of debit-card transactions.

Read the full piece here.

Introduction

Imagine you are at the grocery-store checkout line and it is to pay. You enter your credit card in the terminal, assuming that your payment will be routed over the network operated by the brand on your card (typically Visa or Mastercard). But you learn after the fact that the grocery store has chosen instead to route it over China Union Pay.

Most of us would be uncomfortable ceding to the merchant the authority to route transactions over the cheapest network, without considering our concerns about security, reliability, and other card features (including rewards). Yet that is already the case for many point-of-sale transactions made with debit cards—the result of a 2011 regulation implemented by the Federal Reserve. Consumers can, however, often still force the transaction to run over their preferred network by pushing the “credit” button.

But new rules under consideration by the Federal Reserve would extend merchants’ ability to determine how debit transactions are routed to online transactions, while also making it more difficult for consumers to control who gets to handle their personal data and process their transactions.[1] Perhaps more worryingly, a new bill (the “Credit Card Competition Act”) introduced by Sen. Richard Durbin (D-Ill.) would, in the name of “competition,” impose similar routing requirements on credit cards, while ignoring important differences in the competitive framework of debit and credit cards.[2]

Since they emerged more than 50 years ago, payment-card networks have come to play an increasingly important role in our lives, both directly and indirectly. Directly, they facilitate hundreds of billions of transactions every year, representing tens of trillions of dollars in value.[3] Indirectly, they have contributed to a near-complete shift from paper-based to electronic value exchange and accounting in the United States and many other countries. This has, in turn, resulted in enormous efficiency improvements and wider social benefits, such as the development of online commerce, greater ease of travel, and reduced tax avoidance.[4]

The shift from paper to electronic value exchange has been driven almost entirely by voluntary decisions made by businesses and consumers. Despite such clear evidence of market success, over the past three decades, governments have increasingly sought to correct alleged “market failures” in payment-card markets. The main tool governments have used is price controls on interchange-fee rates. More recently, however, several governments—including the United States, the European Union, and Australia—have sought to reduce rates further still by regulating the manner in which payments are “routed” (i.e., the way that messages pertaining to a transaction are sent between the merchant and the issuing bank). This has important implications for consumer protection, fraud prevention, and financial inclusion.

In previous studies, we have shown that regulation of interchange fees typically has slowed the shift to more innovative, quicker, more convenient payment systems, while also reducing other benefits and particularly harming poorer consumers and smaller merchants.^[5]

Prohibitions on exclusivity in routing have similar effects as direct price controls. But imposed routing requirements will have additional effects that go beyond those of price controls and would result in various harms to consumers and the economy. This study seeks to delve deeper into the problem, focusing primarily on the justifications for and effects of regulations that affect the way in which transactions are routed. While “routing” may seem arcane, it is fundamental to the effectiveness of payment networks. Understanding the likely consequences of such regulation is thus important. That is the purpose of this paper.

We begin, in Section II, by describing the technological and economic elements of payment-card routing. Supporters of forced routing requirements contend that they will promote more efficient competition in consumers’ payment-card usage. But we show that this superficial argument ignores the basic economic realities of payment-card networks, as well as the fundamentally different nature of consumer competitive choice, both in debit-card markets (where routing requirements currently exist) and in credit-card markets (the intended target of Sen. Durbin’s proposed law). Section III reviews the evidence regarding the effects of regulating payment networks. We summarize the pernicious effects of price controls and then explain how the routing mandate created by the 2011 Federal Reserve regulation, known as Regulation II, has had similar effects. Section IV considers the proposed changes to Regulation II and the new Durbin proposal to regulate credit-card routing, with a particular focus on the likely harmful effects of the changes on the incidence of fraud and the knock-on effects on issuers, cardholders, and merchants. Section V concludes.

[1] Debit Card Interchange Fees and Routing, FR 26189 (2021), available at: https://www.govinfo.gov/content/pkg/FR-2021-05-13/pdf/2021-10013.pdf.

[2] Credit Card Competition Act of 2022, S. 4674, 117th Cong. § 2 (2022), available at: https://www.congress.gov/117/bills/s4674/BILLS-117s4674is.pdf.

[3]  Global Network Card Results in 2021, Nilson Report Issue 1224, https://nilsonreport.com/mention/1672/1link.

[4] See the appendix to this paper and references therein.

[5] See Todd J. Zywicki, The Economics of Payment Card Interchange Fees and the Limits of Regulation, ICLE Financial Regulatory Program White Paper Series (Jun. 2, 2010), available at http://laweconcenter.org/images/articles/zywicki_interchange.pdf; Todd J. Zywicki, Geoffrey A. Manne, and Julian Morris, Unreasonable and Disproportionate: How the Durbin Amendment Harms Poorer Americans and Small Businesses, International Center for Law and Economics (Apr. 25, 2017); Todd J. Zywicki, Geoffrey A. Manne, and Julian Morris, Price Controls on Payment Card Interchange Fees: The U.S. Experience, George Mason Law & Economics Research Paper No. 14-18, (Jun. 6, 2014).

Abstract

The institution of bankruptcy law seeks to facilitate economic efficiency by enabling the reorganization of economically viable but financially distressed firms and facilitating the liquidation of economically failed firms. Does the U.S. Chapter 11 bankruptcy process perform this filtering function efficiently? Using data from large public bankruptcies between 1981-2010, we find that it does not. Specifically, (1) evidence on matched performance differences between bankrupt firms and industry counterparts indicate that there is no improvement in the performance gap between bankrupt firms and industry right before and after bankruptcy, and, (2) firms emerging from bankruptcy do not exhibit financial performance catch-up behavior to their going concern industry counterparts. In addition, we find (3) judicial bias in favor of reorganization in cases involving firms with more employees and operations closer to the judge’s district, suggesting that bankruptcy judges respond to social-political considerations, when deciding whether to reorganize the firm.