What the Experts Say: Government Regulation of Interchange Is Bad Policy

"Companies do not simply conjure products or services out of thin air like magicians. They must invest time and resources to produce their goods, which are then priced accordingly. When government steps in and arbitrarily rules that the product price must be fixed at some other point than where supply meets demand, distortions (such as shortages) result."

– National Taxpayers Union (April 16, 2008)
Full letter to Members of Congress >

"The real solution is to keep the government out of retail transactions, by encouraging retailers and credit card companies to negotiate on interchange fees in a free market setting. Winners and losers should be chosen by the market, not three unelected judges."

Grover Norquist, President, Americans for Tax Reform
Full letter to Members of Congress >

"As the experience of Australia in limiting fees shows, consumers will lose benefits, such as the popular rewards programs, as card companies look to make up their costs and retailers do not pass on their savings. Moreover, retailers themselves would lose from the lack of choices that would result from such price controls."

Eli Lehrer and John Berlau, "A Flawed Blueprint: A Free Market
Analysis of the Treasury Department's Financial Regulation
Proposal." Competitive Enterprise Institute (April 10, 2008)
Full letter to Members of Congress >

"Nobody is forcing retailers to take credit cards. If a business doesn’t want to pay interchange fees, it is free to go cash-only, or accept checks instead. Still, most shops gladly take plastic, because they’ve realized that customers spend more when they can pay with a credit card."

Ryan Radia, Competitive Enterprise Institute
Click here for entire post >

"We believe that any effort to rein in credit card practices should be carefully crafted to ensure that smaller financial institutions . . . are not unduly burdened by unnecessary regulation or unintentionally harmed by these legislative efforts."

– Bill Spearman, CEO, Mid-Hudson Valley Federal Credit Unions
Testimony to the House Committee on Small Business (April 3, 2008)

"The increased regulatory risks, costs and burdens which may result from the enactment of these proposals could be the tipping point that causes some community banks to discontinue offering credit cards products."

– William Rosacker, President, United Bankers' Bank
Testimony to the House Committee on Small Business (April 3, 2008)

"If three government lawyers establish payment system prices, rather than markets, resources will be misallocated, innovation and competition will be dampened throughout the payment value chain, and U.S. consumers, 164 million of whom hold general-purpose credit cards, will be harmed."

– Eric Grover, "Viewpoint: Let Market, Not D.C.,
Set Interchange Rates", American Banker

"Many people use a credit card to launch a business. Some use them to pay for medical emergencies. Still others use them to get through unforeseen tragedies, as did one of my constituents whose credit card 'saved' him so he could pay for the funeral when he lost his wife."

– Congressman Jeb Hensarling, Chairman of the Republican Study Committee,
on the benefits that the electronic payments system
provides to American consumers.

Retailers have invested in electronic payments systems and choose to offer the option because consumers prefer it and because it increases sales. Now some retailers want all the benefits without paying for them. What they really want are price controls. But many respected experts across the spectrum agree: price controls will lead to higher consumer costs and fewer choices for cardholders.

“There is a consensus among economists that, as a matter of theory, it is not possible to arrive, except by happenstance, at the socially optimal interchange fee through any regulatory system.”

– David Evans, University College London, and Richard Schmalensee,
MIT Sloan School of Management; May 2005

“This accelerating focus on cost-based regulation of interchange fees is also quite perplexing in view of the common recognition among economists and policy makers that heavy-handed price regulation is rarely desirable and risks unintended consequences (such as…shifting of cost burdens to consumers) that can distort markets.”

– Margaret E. Guerin-Calvert and Janusz A. Ordover, New York University; December 2005

“We do not believe, however, there is any convincing evidence that price regulation benefits consumers.”

– Robert E. Litan, Brookings Institution, and Alex J. Pollock,
American Enterprise Institute; February 2006

“The Reserve Bank had hoped the savings made by stores would be passed on to consumers through lower prices for goods and services. But Dr. Lowe admitted there was no evidence that these savings had translated to lower prices.”

– “Card Sting,” Consumer Affairs, May 16, 2006
(Reference to Dr. Philip Lowe, Reserve Bank of Australia)

“The current system of interchange fees is a necessary part of an industry that provides enormous benefits to consumers.” “It is hard to imagine how intervention in the form of price regulation could possibly improve matters.”

– The Honorable Timothy J. Muris, Former Chairman, Federal Trade Commission; July 2006.

”Direct systems of price regulation create as many distortions as they remove.”

– Richard Epstein, Columbia Business Law Review, 2005

“…too little is known at this juncture either to settle the argument definitively or to justify regulatory intervention.”

– James M. Lyon, Federal Reserve Bank of Minneapolis; June 2006