IT'S TIME TO GET RID OF DEBIT FEE PRICE CONTROLS

The following information was released by the Cato Institute:

Solveig Singleton

Merchants pay fees to debit card networks (called "swipe" or "interchange" fees) each time a consumer uses a card. In 2010, the Durbin Amendment capped debit card interchange fees in the United States. On October 26, the 8th Circuit Court of Appeals ruled that the Federal Reserve exceeded its authority by including costs such as a share of expected fraud losses as part of interchange fees, thus setting the cap too high. In 2025, a district court in Kentucky had upheld the Fed's rule: if the Sixth Circuit upholds the Kentucky court, the conflict between the circuits could reach the Supreme Court.

The legal detailsincluding the courts' disquisitions on economic theory and comma placementthough interesting, are a distraction: the real problem is that the Durbin Amendment is a misadventure in price controls. Price controls on financial services harm consumers, for the same reasons that price controls on gasoline or fire insurance harm consumers. When regulators force prices down, firms react by raising other prices or by cutting services or service quality.

The Legal Dispute Masks the Real Policy Issues

The 2010 statute that enacted the Durbin Amendment states that in setting the cap on interchange fees, the Fed shall consider "incremental cost incurred ... in the authorization, clearance, or settlement of a particular electronic debit transaction" but shall not consider other costs "which are not specific to a particular electronic debit transaction." That is, Congress mentioned two categories of costs. The legal arguments turn on whether the Fed had the discretion to consider a third category of costs. The 8th Circuit said no because Congress intended for incremental costs to be considered and fixed costs not to be. The Kentucky district court said yes: some costssuch as an allowance for fraud lossesdo not fit the statutory descriptions of incremental or fixed costs, and the Fed had the authority to decide whether the cap should be set high enough for the networks to recover these costs.

Regardless of how one views the legal arguments, policymakers should focus on the three core policy problems with price controls that underlie the dispute.

Price Controls on Financial Services Harm Consumers and Skew Incentives

First, price controls on financial services do more harm than good. In response to the Durbin Act, 77 percent of merchants made no change to their prices, 22 percent actually raised prices, and only about 1 percent lowered them. Card issuers adapted to the Durbin Amendment by offering fewer rewards, scaling back services, and increasing fees and minimum checking account balances. One study estimates that caps on debit card interchange fees cost consumers from $22 to $25 billion.

Second, cost-based price regulation is particularly unwise. Yes, in an ivory-tower mathematical model of perfect competition, prices fall to costs. But as the economist William Baumol has noted, these models were never intended to show how the real world should work. In the real world, prices that rise above costs invite disruptive new competitors into the market. In the real world, innovators strive to bring costs down to increase profits. In the real world, when regulators tell firms that prices must track actual costs, firms are encouraged to raise costs. When regulators tell firms that prices must follow idealized models of incremental cost, incentives to invest in better networks are lost, and drawn-out legal disputes over how to measure costs often follow.

Third, the dispute highlights recent Supreme Court cases that reduce court deference to administrative agencies. This case shows that the courts' long history of deference to agencies has led Congress to get into the habit of handwaving bad laws into existence and leaving it to agencies to make the best of things. The final lesson of this dispute is that Congress needs to resist the temptation to undermine market pricing.

Conclusion

Price controls on interchange fees harm consumers, discourage innovation, and foment endless disputes. The courts cannot solve these problems, but legislators can. It is time to eliminate interchange fee caps entirely.