credit cards
If you’ve ever wondered why some fuel is more expensive using credit than with cash and stores tell you “no credit under ten dollars,” one policy expert says you can thank your U.S. senator.
Attached to the post-recession financial reform laws in 2010 was something called the Durbin Amendment. Named after Illinois Sen. Dick Durbin, the amendment led to a cap on credit companies’ “swipe fees” per purchase at roughly 21 cents.
To make up those losses, the companies charged 21 cents on all transactions, regardless of how small. That charge was simply passed on to the consumer in the form of higher prices or not allowing credit cards to be used on small transactions.
Tho Bishop of the Mises Institute says that unintended consequence has cost consumers billions of dollars since it took effect in 2011.
“Any consumer upset with seeing their bank fees rise, be it losing free checking, higher ATM fees, etc. All of that has to do with financial institutions trying to make up the revenue that they lost with the Durbin Amendment.”
He says gas stations offer incentives to pay in cash since the difference on something like 20 cents per gallon of gas would make up for the difference in charges they would otherwise pay for a credit transaction.
According to a 2014 Federal Reserve Paper, large financial institutions lost an average of $14 billion every year because of the Durbin Amendment. Meanwhile, a paper by George Mason University estimates that, as a direct result of the Durbin Amendment “there will be a transfer of $1 billion to $3 billion annually from low-income households to large retailers and their shareholders.”
Bishop said he believes the Durbin Amendment should be one of the first measures repealed by the incoming Trump administration. There is currently a bill in Congress that would repeal the amendment.
Senator Durbin’s office said the credit companies are to blame for higher costs because they increased swipe rates. They said by email, “MasterCard and Visa were not forced by the Durbin Amendment to dramatically increase those swipe rates — they did so because they care more about serving their card-issuing banks than serving merchants and consumers.”
Mastercard issued a policy paper on the Durbin amendment, saying that the measure was well-intentioned but “when regulators cap prices in a free market, we have seen that the consequences are very different from the intention.”