Central planning, never out of fashion on the left, is now more popular than ever on the right thanks to the populist GOP takeover. That’s why a recurring effort to intervene in the credit card processing market finds more support in the new Congress than in the previous one.
Interchange fees are charged by payment networks, such as Visa or Mastercard, each time you use a credit card. The fees collected go to both the credit card processing service and the card issuer. Card issuers must maintain and improve payment networks, protect data, combat fraud and bear the risk of debtor default. The fees cover all of this.
Some merchants who appreciate the benefits of accepting credit cards as a means of payment, namely attracting customers who prefer this convenience, have decided that they don’t like paying the price. So, as special interests often do, they turned to Washington to intervene on their behalf. Of course, they and their advocates say this will benefit the public, since their savings would supposedly be passed on to consumers through lower prices.
That’s how we got the Durbin Amendment, which is part of the Dodd-Frank Act of 2010. This price control measure capped the fees that debit cards could charge. Since then, Sen. Dick Durbin (D–Ill.) has wanted to extend the idea to credit cards. So far this has not happened.
Enter the Credit Card Competition Act, which Durbin sponsors. This is an attempt to reduce credit card fees using a slightly different route: rather than direct price controls, it would change the Electronic Funds Transfer Act to require the Federal Reserve to require that banks add at least one additional payment network for their cards. Proponents, including a handful of Republicans, such as freshman senator from Ohio and populist conservative JD Vance, say the additional competition requirement will drive down costs for merchants and ultimately , for consumers.
Yet there is little reason to believe this, and very good reason to fear the emergence of unintended harmful consequences. This is not idle speculation; we’ve seen him play with debit cards before. After the Durbin Amendment was passed, a Federal Reserve Bank of Richmond study found that almost none of the savings were passed on to consumers despite a $145 billion reduction in fees paid by retailers.
Not only has the Durbin Amendment not helped customers, it seems to have hurt them. This has resulted in the widespread elimination of debit card rewards programs and fewer banks offering free checking accounts. The ranks of the unbanked increased by about 1 million people. Some of this is likely to happen again if more central credit card planning is adopted.
Unsurprisingly, it’s not just about small businesses. The effort is mainly driven by Walmart and Target, which are expected to earn billions of dollars in additional revenue. The increase in revenue for big box stores is not a problem in itself, as long as it results from better service to consumers. But this government-induced increase in big box profits would come by reducing bank revenues and in turn removing some consumers’ favorite card networks, further limiting competitive differences between card products and rewards programs. popular credit cards.
As explain by The dot guya popular consumer credit card and travel benefits website, “If passed, this bill could dramatically change the rewards ecosystem. It could affect your ability to collect (and redeem) points and miles to travel or earn money that can offset some of your daily expenses.”
It is also an example of the indignation inflicted on us by theater politicians. Think how strange it is that Vance agreed to bid on Target after saying he wouldn’t shop there again due to the company’s woke agenda. While it is fun to denounce the inconsistencies of legislators, what worries me is that fewer and fewer people are defending this economic fundamental:
Central planning fails because its success would require the mind of God, but planners are human. Even if they weren’t corruptible in some way, they can never be knowledgeable enough to outperform the market, which is made up of countless detailed consumer and seller information that is reported by price. Interference in the market process, whether through direct or indirect price controls, inevitably produces adverse unintended consequences.
Left to its own devices, the market has found a balance between card issuers and merchants. Politicians who intervene to favor one side or the other will, as always, cause unpleasant surprises.
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