The last year has been a difficult one for brick-and-mortar retailers and restaurants. The pandemic forced many to close for weeks at a time and sales have been anemic even when they’ve been open.
While Congress has taken numerous steps to try to help them—besides two rounds of the Payroll Protection Program the federal government has spent trillions of dollars in an attempt to stimulate the economy—mere stimulus is ineffective for a dine-in restaurant that can only operate at 50 percent capacity.
Some retailers have begun agitating for another bit of assistance: a cap on the credit card fees they pay.
Card usage ratcheted up during the pandemic, thanks to people buying more goods and services online and also spurred by a desire to conduct contactless payments via smart phones and contactless cards..
In 2010 Congress enacted the Durbin Amendment as part of Dodd Frank. The amendment capped debit card fees, as a possible model for Congress to reduce credit card fees as well. The fact that Senator Richard Durbin—broker and namesake of the aforementioned amendment—is now chair of the powerful Judiciary Committee gives them a reason to believe such an outcome is achievable.
Today, credit card fees are about 2.2% of the transaction, a fraction that’s remained largely constant over the last decade. However, treating credit card fees as de facto taxes that hinder commerce—and can simply be reduced without any untoward consequences—does not account for the fact payment processing is a bona fide service that comes with very real costs and benefits, and both have, in fact, increased over the last year.
For starters, payment processors have been forced to invest heavily in order to reduce fraud—which is more difficult to do with online commerce. The payment processors—not the banks or the stores or the customers whose cards get compromised—pay the costs of preventing and mitigating this fraud.
What’s more, in the last few years credit card companies have put in place an entirely new system that has done away with swiping—and the security problems endemic with that system—and transitioned to a credit card run with a chip.
It has also created methods for people to use their smartphones to make payments, which also necessitated considerable up-front investment on their part. The pandemic greatly accelerated the adoption of this technology well beyond what the payment processors anticipated at the beginning of last year, which forced them to increase their investments on that front. These modernizations cost the payment processors billions of dollars.
Governments across the world have made that task much more difficult by enacting data localization rules requiring them to store the data for transactions conducted in a particular country in that country itself. Such data centers are costly to construct and require multiple backup systems and security, and it would be much more cost-efficient to centrally locate them in one place. Instead, they are needlessly proliferating.
The use of credit card rewards cards is also increasing steadily, which means that customers are effectively being rebated a sizable portion of what they spend. In 2020 these rewards were estimated to exceed $40 billion dollars.
While many seem to want to repeal the laws of supply and demand during the pandemic, they remain inviolable, and imposing a price ceiling on the cost of providing these services means that fewer people will ultimately have access to credit cards—mainly people with lower incomes who are worse credit risks and who are more likely to default on their debt.
The credit card market is intensely competitive, and that reality has kept interchange fees constant in the last two decades. However, if the government imposes price caps on these companies we’re likely to see them respond by trying to reduce costs—and one obvious way they could do so would be to do less to extend credit to low-income households who represent a significant risk of nonpayment.
Senator Durbin’s regulation on debit card fees ultimately caused millions of low-income consumers to lose access to key financial services. A Durbin Amendment to credit cards would mean millions of low-income consumers losing access to credit and small banks losing billions in revenue.
