MISSOURI CENTURY FOUNDATION

OPPOSITION TO GOVERNMENT PRICE CONTROLS

Overview

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Our goal is to improve the quality of life for current and future generations of Missourians by supporting forward-looking policies that have a strong free-market core.  Policies such as an expansion of the price controls mandated by the Durbin Amendment would benefit large retailers to the detriment of all Missouri consumers, particularly those with lower incomes.

Key Points

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• The Durbin Amendment failed to do what its proponents promised; rather than lowering costs for consumers, the government-mandated cap on debit interchange fees resulted in increased retail prices and banking fees for consumers, and reduced or eliminated the benefits of debit reward programs.

• Not only did the Durbin Amendment increase costs for consumers, but low-income consumers now bear the majority of increased checking account fees and reduced access to free banking.

• Despite the failure of the Durbin Amendment to benefit consumers, the current Administration supports efforts to implement further price controls on interchange fees.

• Missouri Century Foundation is committed to protecting the economic welfare of our citizens.  Continuing to allow government price controls, and expanding those to credit card transactions, will only harm consumers further.

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Consumers Lose with Government Price Controls

In 2010, Senator Richard Durbin proposed an amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act that capped interchange fees for debit card transactions for large banks with $10 billion or more in assets.  

An interchange fee is paid by a merchant’s bank to a consumer’s bank for each card transaction.  Supporters of the amendment claimed consumers would ultimately benefit from merchants’ savings; retailers would pay less in transaction fees, which would translate to lower costs for consumers.

Unfortunately, though perhaps predictably considering the lack of public hearings and debate, consumers lost out to retailers.  In the ten years since the law took effect, the price controls on interchange fees mandated by the government show little evidence of any consumer benefit.  Even worse, there is evidence showing low-income Americans are harmed the most.

A survey conducted by the Federal Reserve Bank of Richmond in 2015 found that “the vast majority of merchants in the survey (77.2 percent) did not change prices post-regulation, very few merchants (1.2 percent) reduced prices, while a sizable fraction of merchants (21.6 percent) increased prices.”

Consumers lost out not only from increased retail prices, but their card-issuing banks were forced to make up for the lost revenue elsewhere.  Issuers use interchange fee revenue to support consumer security and rewards programs.  The Durbin Amendment resulted in a 25% decrease in interchange fee revenue for the large banks targeted by the legislation. 

Without being able to charge a fair market interchange fee, debit card issuers have been forced to cut rewards programs and other valuable cardholder perks that once were considered routine.  A 2019 study by the University of Pennsylvania Carey School Of Law found that basic checking account fees doubled after the Durbin Amendment, and that those bearing the fees are overwhelmingly low-income consumers.  The same study shows banks reduced the share of free checking accounts by 40%.  

Even though small banks, those with less than $10 billion, were exempt from the bill, small financial institutions such as credit unions and community banks were nevertheless negatively impacted.  The National Association of Federally-Insured Credit Unions notes that the Federal Reserve’s own data shows a 22% decline in revenue from PIN transactions for these smaller institutions.

Government should not be in the business of controlling prices.  Time and again, we’ve seen the harmful effects on consumers from government attempts to control the market – just look at prescription drug costs, rent control laws, and health care premiums.  Despite historical evidence, the Biden Administration still supports efforts to distort the market when it comes to debit, and now possibly credit, interchange fees.  Now more than ever, with American consumers facing the largest increase in prices since 1990, we need to work towards greater competition through fewer regulations that will realistically lead to a healthy economy for Missourians and all Americans.