A Durbin amendment for credit cards will reduce their ubiquity and do nothing to reduce inflation

One of the ways the Biden administration and the Democratic Congress have tried to deflect opprobrium for about last year’s spike in inflation has been to blame intermediaries — those entities that facilitate transactions between buyers and sellers. – for having contributed to the price increase. without providing anything of value for what he receives.

Over the past few months, he has investigated the prescription drug market, online platforms operated by big tech companies, oil and gas producers, and food delivery apps, to name a few. -ones.

Last week, Senator Durbin signaled that he was considering adding only Mastercard and Visa to this list by introducing legislation that would require credit cards to be activated with at least two unaffiliated networks, which would require the replacement of every credit card currently in circulation with a new, more expensive card for consumers. The legislation mirrors the so-called Durbin Amendment to the Dodd-Frank Act of 2010, which imposed a similar requirement on debit card transactions.

However, blaming credit cards for the high prices is little more than an exercise in political distraction: the new routing mandates will do nothing to help small merchants and would likely reduce the ability of poorer Americans to get money. credit card.

Credit card fees range from around 1-3.5% and have slowly come down over the past few years: larger retailers are able to leverage their market power and negotiate lower rates.

Large retailers welcome this legislation as it is supposed to save them money. For example, Amazon made about $340 billion in sales last year; given that roughly two-thirds of all online sales are made through credit cards, that would mean he sold around $225 billion that way. Even assuming a low rate of 1% for acceptance fees, that would mean Amazon paid $2.2 billion in fees. Halving those fees via regulatory clearance would net Amazon at least $1 billion in additional revenue.

Small businesses that have little or no market power are unlikely to see any reduction in fees.

Consumers lose out. Some of these interchange fees are used to pay the administrative costs of operating the card programs and extending credit to consumers and small businesses, but much of this money is also returned to consumers through their credit card rewards – 60% is the industry average. The most generous programs return up to 4% of all spending back to the consumer in the form of frequent flyer miles, hotel points or cash back, and for some industries or merchants this can go even higher.

Consumers have come to love their rewards cards, and for good reason: in 2020, rewards were around $60 billion, which is no simple change. Airlines and hotels particularly appreciate the program, which helps them retain customers and increase sales.

A routing mandate would work as a cap on credit card fees, as the second network would reduce costs for large merchants, and it would almost certainly mean the end of co-branded rewards cards provided by Mastercard and Visa; since Discover, American Express and other networks would be exempt from these regulations, they would likely move to jump into this void.

A bank or merchant would have little incentive to enter into a co-branded agreement with a regulated Mastercard or Visa whereas they could enter into an unregulated agreement with Amex or Discover and return more to the customer.

However, there is no reason to think that consumers will fare any better with this cap: a study I conducted with my former colleague Chris Richardson and published earlier this year found that consumers stood to lose about $17 billion because of exchange regulations, or about a third of what they receive from credit card rewards. We found little evidence that this loss would be offset by lower prices for consumers.

The settlement would also lead credit card issuers to raise the income and credit score threshold for people to get a credit card. Consumers who are at greater risk of default may no longer be profitable customers for banks and credit unions. Financial economists believe the original Durbin Amendment caused the demise of free verification and debit rewards programs, which could increase the number of households without access to credit cards. There is currently no co-branding of debit rewards from Mastercard and Visa.

The idea that the credit card industry is a static oligopoly that desperately needs more regulation is completely wrong. These days, consumers have more ways to pay for transactions than ever before and new market entrants and technologies including blockchain and Buy Now Pay Later providers have the potential to completely disrupt the market. Crippling the two largest and most efficient issuers would do little to reduce consumer costs while making it harder for low-income households to get credit.

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