How Capping Credit Card Interchange Hurts The Economy

The Dick Durbin-Roger Marshall legislation trying to limit credit card interchange, to reduce costs for big businesses, would mean less credit and more costly credit for consumers.

For banks covered by the law, they’d no longer make as much on credit cards. So they’d no longer spend as much marketing cards to consumers, investing putting cards in the hands of consumers. That makes credit less available. As the New York Federal Reserve explains,

Credit availability is a crucial ingredient in any advanced economy’s recipe for economic growth because credit can support investment in productive enterprises and can smooth household spending from fluctuations in income

Where interchange has been limited, like in places such as Australia, credit card annual fees have risen since spend on the cards isn’t as profitable.

Europe, where interchange is limited and the use of cards as a payment mechanism is less common than in the United States (and cash more prevalent), is much poorer than the United States. That’s hardly the only reason, or the most significant reason. It’s a bundle of policies, and the U.S. would be ill-advised to follow European economic, financial and regulatory policy.

Per capita GDP in 2020 U.S. dollars:

  • Greece: $17,676.19
  • Spain: $27,057.16
  • France: $38,625.07
  • U.K.: $40,284.64
  • Germany: $45,723.64
  • U.S.: $63,543.58

Ben Bernanke literally just won the Nobel Prize in economics, with the committee citing his “Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression” which showed the role of limiting the supply of credit in reducing economic output, driving the Great Depression. Big banks aren’t likely to fail from capped interchange, but lending matters to the economy.

This specific legislation to cap credit card interchange wouldn’t actually kill credit card rewards entirely as some have suggested, but it would be bad for consumers. Remember that where interchange has been capped prices to consumers haven’t fallen. This is lobbied for by big retailers not because it’s to your benefit.

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