Small: Credit card debate based on false assumptions

Credit card debate based on false assumptions

By Jonathan Small

“Underlying most arguments against the free market is a lack of belief in freedom itself.”

Those are the words of Nobel Prize-winning economist Milton Friedman. Oklahomans are seeing this lack of belief in freedom firsthand as out-of-state interest groups seek to raise the minimum wage. Not to be outdone, lawmakers in Washington share the same unbelief in freedom as they seek to pass the poorly named Credit Card Competition Act.

The CCCA attempts to push down interchange fees—or “swipe fees”—for credit card users by prohibiting banks from requiring merchants to use a specific network like Visa or Mastercard. The purported reason for doing so is to increase competition among payment networks. But market competition isn’t achieved through government mandates, and the CCCA primarily serves to expand the role of the federal government—and worse, the Federal Reserve—in the credit card market.

We’ve seen this before. The CCCA’s primary author, Dick Durbin of Illinois, tacked on an amendment to the Dodd-Frank Act following the 2008 banking crisis. The Durbin Amendment, as it came to be known, was the same policy but for debit cards. Rather than reducing prices, most merchants increased prices after the change.

But the Durbin Amendment did result in lower revenue from interchange fees. As a result, the number of free checking accounts diminished sharply, and many banks stopped offering rewards on debit cards.

Many consumers switched to credit cards, which still allow cardholders to benefit from rewards like cash back, airline miles, and other perks. Cardholders stand to lose those benefits if the CCCA is passed—especially in light of the estimated $5 billion price tag to overhaul payment systems to comply with the law.

The reality is merchants can already choose to use smaller payment networks, but most choose not to so they can accommodate their customers. Customers frequently choose cards associated with the larger networks to take advantage of advanced security, greater fraud protection, and various rewards.

The Federal Reserve is already responsible for devaluing the dollar to the point where raising the minimum wage seems like a good idea to some. It would be a huge mistake to allow it to further meddle in markets and meddle in the contracts of private parties. Congress should heed the words of Milton Friedman and embrace—not fear—freedom.

Jonathan Small serves as president of the Oklahoma Council of Public Affairs.