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New Debit Card Regulation is Coming

On June 8, S 575, an amendment which would have delayed price controls on debit card interchange fees by two years, failed to pass the Senate.  Interchange fees are small fees that retailers pay to debit card providers every time a card is swiped in their store. These fees compensate debit card providers for the use of their services. Last year Senator Durbin succeeded in attaching an amendment to the Dodd-Frank financial reform bill ordering the Federal Reserve to impose price controls on interchange fees. Currently the average fee per transaction is about 44 cents. When interchange fee regulation takes effect on July 21 the maximum fee will be capped at 12 cents.

Interchange fee regulation is a classic example of one party using the force of government to take wealth from another. The Durbin amendment was the result of successful lobbying on the part of retailers who clearly benefit from lower transaction fees. Retailers claim that they are at the mercy of debit card companies and out of control fees. However, their argument fails to account for the fact that interchange fees are a product of a free market system that includes checking, cash, and other payment options. Consumers, debit card companies, banks, and retailers all benefit from debit card use. Retailers are not required to accept debit cards. They do so because accepting debit cards provides benefits such as the ability to receive secure instant transactions and the ability to market their goods to customers who prefer to use debit cards. The fact that they choose to accept debit cards demonstrates that they believe that the benefits outweigh the costs.  

Every time the government tries to interfere with prices established by the market there are unseen costs.  Congress justified its action by claiming that the savings from lower fees will be passed along to the consumers in the form of lower prices. However, in Australia where similar price limits are already in place, consumers have not seen any of the savings. What they have seen is higher fees for using debit cards and cuts in rewards programs, as a result of card companies looking to make up for lost income.

Under a capitalist system entrepreneurs invest money in order to earn profit. Debit card companies have invested large amounts of capital into developing secure worldwide networks, something that is ignored when the government imposes price controls. When entrepreneurs must bear the risk of investment but are prevented by law from receiving the rewards, they lose their incentive to invest, which in turn slows the whole economy.

 Interchange price controls undermine the free market, and benefit retailers at the expense of banks, debit card companies, and consumers. Unfortunately, after the failure of S 575 it appears that the United States is set to experience firsthand the economic damage that price controls can cause.  Consumers may face a host of new costs as debit card providers seek to make up the losses from retailers no longer paying market rates for debit card services.  Ironic for a regulation issued as part of the Wall Street Reform and Consumer Protection Act.