A Second Durbin Amendment Won’t Help Low Income Consumers

Retailers that accept credit cards pay an interchange fee for processing each transaction. The fee depends on the volume of business the retailer does and ranges from 1.2 to 3.5 percent of the transaction’s cost. Credit card companies use the interchange fees to pay for their costs of providing the service (the processing and fraud costs, to name two), but they also return some of that fee to their customers in the form of rewards points. In 2021, rewards points approached $60 billion.

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

However, there would be an unintended downside of capping interchange fees—in such an environment, households with low credit scores may find it impossible to obtain a credit card, as they are typically the most expensive customers to service. While issuers may very well reduce credit card rewards with such a cap or routing mandate, there’s no reason to believe that this would reduce costs to low-income consumers or increase their access to credit.

We recently published an analysis of the credit industry to determine how regulating credit cards would impact the market. Our analysis suggested that consumers stand to lose as much as $17 billion from credit regulation, which amounts to roughly ⅓ of what they received in credit card rewards. However, in no way would that be made up via lower fees or consumer prices—we estimated that the consumer savings from the interchange fee cap would be less than $30 million.

Perhaps more important is that those households who either don’t own credit cards or don’t qualify for rewards cards would likely not benefit from the interchange cap either. When the government capped the interchange fees for debit cards, banks responded by effectively eliminating cost-free perks—such as free checking for those with a small minimum balance—that they once gave their customers to induce them to put their money in their institution. If marginal and relatively costly credit card consumers produce even less revenue than before for credit card issuers, it will become more difficult for them to access credit.

What’s more, Congress is also considering a requirement that all credit cards be enabled with at least two unaffiliated networks and mandating routing for credit transactions in an attempt to provide more consumer choice and—ostensibly—to reduce the market power of credit cards. As with fee caps, it is hard to see how this would increase access to credit for low-income households or households with low credit scores. Implementing such a system would force virtually every retailer to obtain a new processing machine and require every credit card in the U.S. to be replaced, tasks that together would cost billions of dollars. How enhanced competition in routing would make credit more available for low-income households is a mystery.

Capping interchange or extending routing mandates isn’t going to reduce costs for low income households or somehow make it more cost-effective for credit card issuers to extend them credit cards; instead, it will likely result in more people unable to obtain credit. It is a costly and ineffectual remedy to the problem it’s supposed to solve.