Interchange Fee Cap Is No Gift to Low Income Consumers

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by Jon Decker

The Wall Street Journal overlooked many consequences to low-income consumers in its June 21 article “The Credit-Card Fees Merchants Hate, Banks Love and Consumers Pay.” If capping credit card interchange fees (the transaction fees which merchants are charged) would result in a windfall for the poor — why did the exact opposite happen when we capped them for debit cards? 

When debit card interchange fees were capped in Obama’s Dodd-Frank legislation, fees on deposit accounts increased from an average of 3% to 5%. These fees included additional monthly account maintenance charges (with higher minimum balance requirements), insufficient-funds fees, inactivity fees, and fewer rewards. Taken together, this amounted to a direct attack on low-income families.

The fee cap also completely backfired from its intended result on the merchant side. The Richmond Fed found that, after the fee cap was instituted, 77 percent of merchants did not change their prices, just over 1 percent actually reduced prices, and over 21 percent increased prices.

Low-income consumers are being sold a trojan horse on capping credit card interchange fees. Thousands of years of history tells us that government price controls never result in more prosperity. 

 

Photo Credit: Investment Zen