Angelino Viceisza, Ph.D.
As a professor of economics, examining the impacts of economic policy on consumers has always been a priority in my research. Throughout my career I have found that when assessing the effects of economic policymaking, it is critical to determine the potential negative, sometimes unintended, effects a policy could have on consumers, particularly those in marginalized communities.
This past year, part of my research focused on certain credit card policies, namely adding routing mandates to credit card transactions, and placing caps on credit card interchange fees that banks pay to each other. I explored the impact these policies could have on everyday Americans and discovered some alarming realities.
Routing mandates and interchange fee caps started when Senator Durbin (D-IL) introduced an amendment in 2010 to impose these regulations on the debit market. In response, Senator Tester (D-MT) introduced the “Debit Interchange Fee Study Act of 2011” to research the potential impacts of the amendment before implementing it. Even though the study created by the bill would have predicted negative impacts on consumers, it was rejected and Congress pushed ahead with routing mandates and interchange caps.
The point of the Durbin Amendment was to help retailers save money so they could then lower prices for consumers. Although big box stores made more than $90 billion extra in revenue, a Federal Reserve Bank of Richmond study discovered that 77% of merchants failed to change prices and 21 to 25% actually increased their prices after the Durbin Amendment.
Beyond simply failing its intended purpose, the amendment also had the unintended consequence of harming consumers. In total, a study by Professors Vladimir Mukharlyamov and Natasha Sarin found that consumers lost roughly $3 billion on net annually because of the Durbin Amendment. Durbin may have had good intentions, but the data tell another story.
It is no surprise that the largest companies in the U.S. are currently lobbying Congress to extend Durbin Amendment policies to the credit card market. However, the data and historical evidence speak for themselves: imposing interchange fee caps and routing mandates on the credit market would again help the largest companies rake in billions in extra revenue at great cost to consumers—these savings would not be passed down.
Small banks and credit unions would again lose money and try to adapt by increasing fees and hiking interest rates. Of course, low-income consumers and consumers of color who already struggle to access credit would bear the brunt of a more restrictive credit market. The Federal Reserve Board reports that African Americans and Hispanic Americans are already more likely than their white peers to be turned down for a credit card (African Americans at 23% and Hispanics at 20%, compared to whites at only 15%).
My research found that extending Durbin Amendment regulations to credit cards would cost consumers between $2 billion and $3.7 billion, depending on interchange fee reductions. Financially marginalized communities would again fare worst of all. Collectively, despite making up only 11.7% of the credit card population, lower-income and low credit households would lose $434 million, close to 22% of the cost borne by all consumers. These numbers do not even account for the additional losses consumers would face if credit card rewards disappeared, worth $50 billion a year to consumers.
Americans need only to look to other, similar nations to confirm that extending routing mandates and interchange fee caps to credit cards would be a mistake. The Retail Council of Canada found that if the interchange fee were reduced by 40% it would lead to each adult Canadian being worse off by C$89-C$250 per year due to loss of rewards and increased annual card fees. In Australia, reductions in interchange fees from the Reserve Bank of Australia led to higher cardholder fees and less valuable reward programs.
Based on my research, policymakers should review the existing data before they extend Durbin Amendment regulations to America’s credit card industry. Congress must rely on the data to guide their economic policy decisions, instead of the views of special interest groups. If not, this will end up hurting American consumers, small businesses, and the credit card industry—all of which would have detrimental long-run consequences.
Angelino Viceisza is associate professor of Economics at Spelman College and research associate of the National Bureau of Economic Research. The views expressed in this article are personal and do not represent those of the organizations with which he is or has been affiliated. The study that forms the basis for this article can be found at https://bit.ly/3nFo8d6.