Today, the Senate Judiciary Committee led by Sen. Dick Durbin (D–Ill.) held a hearing titled “Breaking the Visa-Mastercard Duopoly: Bringing Competition and Lower Fees to the Credit Card System.” The hearing centered on “The Credit Card Competition Act” (CCCA), which would cede power to the Federal Reserve (Fed) to control credit card interchange routing, or swipe fees.
The intent of the legislation is to increase competition and lower fees for businesses and, ultimately, consumers. Specifically, the CCCA would require the two largest credit card issuers to enable their cards for processing through at least two unaffiliated payment networks, only one of which can be Visa or Mastercard. (If that sounds confusing, that is because it is—this R Street Explainer helps break down the legislation’s complexities.)
The danger of handing the reins over to the federal government—and, more specifically in this case, to the Fed—is that instead of solving the perceived problem of high processing fees, the government is far more likely to cause various negative second-order effects.
In fact, solid historic precedent shows that authorizing the Fed to mandate swipe fees does not work as intended. Sen. Durbin, a sponsor of the CCCA, also championed the eponymous “Durbin Amendment” of the Dodd-Frank Act, which mandated lower swipe fees on debit cards. The thought was that merchants would pass on those savings to consumers who were hurting financially in the wake of the 2008 financial crisis. However, according to the Fed’s own research, the legislation did not have the intended effect—instead, it destroyed debit card rewards programs and slashed free checking while passing on almost no savings to customers.
More than 15 years later, the Fed still holds the reins on debit card interchange—and consumers are no better for it. The era of debit card rewards is over, and we are likely to see the same disastrous effects in the credit card market should this legislation pass. Critics point to reduced access to credit, dismantling of credit card rewards programs, card security concerns, and even downstream effects like higher costs for airline tickets, to name just a handful of concerns.
The Fed has been profoundly disastrous for the economy. From inflation to housing distortions to the agency’s own role in the 2008 financial crisis and failures with Silicon Valley Bank, its regulatory track record is dubious at best. The idea that the Fed should have the power to pick winners and losers is faulty. Big government will nearly always cause more problems than it solves, and a deeply individualized issue like consumers’ access to credit cards of their choosing should not be ceded to the Fed.
