Proposals to cap interchange, or swipe, fees rest on bad economics, ignorance about payment systems and rent-seeking by large retailers. Interchange fee caps are a money grab for big merchants (which is why merchants lobby for them), but are an unambiguously bad idea for consumers, small businesses and the overall retail economy.
According to the European Commission, the interchange fee is part of an “inefficient” system that “unduly” raises costs. In reality, however, there’s nothing inefficient about these fees. They’re simply prices charged for an immensely valuable product: electronic payments processing. Charging some (but not all) of this price to merchants instead of consumers avoids deterring card usage and preserves the benefits of electronic payments for everyone.
Electronic payment systems offer much more than just an efficient payment mechanism. They also provide merchants with fraud protection and valuable logistical tools, reduce labor costs and alleviate the cost of offering in-house credit. Properly understood, the price to merchants of accepting payment cards — often decried as a wasteful and unjustified tax on commerce — simply reflects the considerable benefits offered by electronic payments.
So what happens when governments intervene? Consumers suffer. Confronted with the loss of billions of dollars in interchange fee revenue, banks and credit unions have responded by increasing the cost and reducing the quality of consumer bank accounts. The Durbin Amendment to the Dodd-Frank financial reforms (which limited debit interchange fees to incremental processing costs) clearly harmed consumers. Previously, access to free checking had grown from less than 10 percent of accounts in 2001 to 76 percent of accounts by 2009 — but by 2012, only 39 percent of banks offered free checking accounts. And monthly service charges on non-interest-bearing checking accounts have increased 25 percent since 2011. These new bank fees have particularly hurt lower-income and younger households, causing many to drop out of the banking system altogether.
In countries that have capped interchange fees, retailers simply haven’t passed the savings on to consumers. And in the U.S., the Durbin Amendment has actually driven up interchange fees for smaller merchants.
In short, Interchange fee caps don’t actually benefit consumers — only large retailers and politicians looking for a photo-op.