A Second Durbin Amendment Won’t Help Low-Income Consumers

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Retailers that accept credit cards pay interchange fees for processing each transaction. The fees depend on the volume of business of the retailer and vary from 1.2 to 3.5% the cost of the transaction. Credit card companies use interchange fees to pay for their costs of providing the service (processing and fraud fees, to name two), but they also pass a portion of these fees back to their customers. in the form of reward points. In 2021, reward points approached $60 billion.

Some people believe that credit card rewards provide benefits to the wealthy that increase costs for those who cannot benefit. Some politicians and activists have suggested that it foments income inequality and that lower interchange fees would reduce credit card rewards, thereby reducing their impact on inequality. This could be achieved, they argue, simply by capping interchange fees directly or indirectly through routing mandates, just as the government did for debit cards when it passed Dodd-Frank in 2010.

However, there would be an unintended downside to capping interchange fees – in such an environment, households with poor credit ratings may find it impossible to obtain a credit card, as they are typically the customers most expensive to serve. Although issuers could very well reduce credit card rewards with such a cap or routing mandate, there is no reason to believe that it would reduce costs for low-income consumers or increase their access to credit.

We recently published an analysis of the credit industry to determine the impact of credit card regulation on the market. Our analysis suggested that consumers stand to lose up to $17 billion due to credit regulation, which is equivalent to about ⅓ of what they received in credit card rewards. However, this would in no way be offset by lower fees or consumer prices – we estimated the savings to consumers from the interchange fee cap would be less than $30 million.

Perhaps more importantly, households that don’t own credit cards or don’t qualify for rewards cards likely wouldn’t benefit from the redemption cap either. When the government capped interchange fees for debit cards, banks responded by effectively eliminating free perks – such as free checking for those with a small minimum balance – that they once offered to customers for encourage them to invest their money in their institution. If marginal and relatively expensive credit card consumers produce even less revenue than before for credit card issuers, it will be more difficult for them to access credit.

Additionally, Congress is also considering requiring all credit cards to be activated with at least two unaffiliated networks and mandating credit transaction routing in an effort to provide consumers with more choice and, apparently, reduce the market power of credit cards. As with the fee cap, it is difficult to see how this would increase access to credit for low-income households or households with poor credit ratings. Implementing such a system would require virtually every retailer to purchase a new processing machine and require the replacement of every credit card in the United States, tasks that together would cost billions of dollars. How increased competition in routing would make credit more available to low-income households is a mystery.

Capping exchanges or extending routing mandates will not reduce costs for low-income households or make it more profitable for credit card issuers to extend their credit cards; instead, it will likely result in After people unable to obtain credit. It is an expensive and ineffective remedy for the problem it is supposed to solve.

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