The Welch Interchange Fee Bill to Consumers

I recently testified before the House Committee on Financial Services on the “The Credit Card Interchange Fees Act of 2009” sponsored by Representative Welch. The Act would allow merchants to impose surcharges on cards, prevent card networks broadly defined from charging higher interchange fees for reward cards, require card networks to disclose publicly what they are charging each merchant for interchange fees, and establish the Federal Trade Commission as the regulator for the card networks among other things. I tried to educate the Committee on the fact that payment card networks are two-sided so that anything that makes it harder to earn a profit on the merchant side necessarily results in higher fees to the cardholder side. I also pointed out that there isn’t any systematic evidence that the practices the Bill tries to restrict — no-surcharges, the honor-all-card rule, or higher prices for premium cards — harm the public overall. Of course the merchant advocates claim they do but there just isn’t any empirical evidence to support them. My complete testimony is available here.

Some members of the Committee kept referring to the things the Act seeks to restrict as anti-competitive practices. That of course is not true or at least highly debatable. The federal antitrust regulators have never challenged interchange fees. These fees were found lawful by a federal appeals court; although the merchants are taking another run at them in the courts, they have a long way to go with an unpromising legal theory. Although the Wal-Mart settlement required the unbundling of debit and credit cards, the federal regulators have never challenged the Honor-All-Card rule; even the Brussels regulators found the Honor-All-Card rule lawful. To date, there have been no federal challenges to rules that limit the ability of merchants to surcharge for the use of credit cards.

I would hope before considering enacting this legislation, the Committee will demand solid evidence that consumers will benefit — I believe both economic theory and the weight of empirical evidence suggests strongly that consumers will get the short end of the stick. I also hope that the Committee looks carefully at what happened in Australia and Spain where efforts to force interchange fees down harmed consumers. Most of all I hope the Congress thinks carefully about how further restrictions on the lending industry — of which credit cards are a significant part — will affect the availability of credit and the pace of recovery.