Established in 2003, the Australian government went against all the wisdom of basic economic theory to implement price controls on payment cards, capping the fees that banks could charge merchants when a customer used a bank’s card to purchase something from the merchant. The aim was to impose “transparency” in the market and lower prices for consumers, but instead it has continuously led to a reduction in services offered by banks and a rise in prices. As my colleague John Berlau noted recently, the Australian policy has been a clear failure. According to the International Alliance for Electronic Payments, consumers never saw reductions in price, but instead watched the cost of card fees increase up to 50 percent. Further, a recent report on the policy notes that since the interchange cap, “the average net value of rewards credit cards offered by the major banks has nearly evaporated in the space of two years, plunging 96 per cent following the Reserve Bank's interchange fee regulation.”
Rather than admitting that the policy has failed, however, the Productivity Commission has doubled down and advocated for the total ban on interchange fees on credit cards, arguing that the evidence in favor of such fees is “feeble.” Only government bureaucrats can take poor economic theory and unsuccessful empirical evidence and decide that what is needed is even more intervention. Unfortunately, the effects of further fee caps on credit cards will be more of the same—a greater restriction on Australian’s access to financial services.
If the Productivity Commission were unwilling to look at the problems created in its own backyard, perhaps it would do well to examine what has happened in the United States under a similar policy. The Durbin Amendment, established as part of the Dodd-Frank Act, sought to cap the interchange fees charged on debit cards—and the results have been disastrous. Prior to the enactment of Dodd-Frank, around 76 percent of all checking accounts were free of charge. This fell dramatically in the wake of the price controls, to 45 percent by 2011 and 39 percent by 2012. Recent examples include Bank of America’s decision to cancel their free checking program, as it is no longer profitable to offer these checking accounts to low-income consumers. This has meant that around one million people have exited the banking system, unable to afford the rising fees associated with basic checking accounts.
Just like in Australia, the large retailers who extensively lobbied the government to impose the price controls claimed that they would be able to pass the savings along to consumers. But that never happened. Multiple surveys have found that large merchants simply kept the reduced cost as a windfall. A survey conducted by Javelin Strategy found the opposite for small merchants, who did not even know about the Durbin Amendment, while only three percent of those surveyed believed that the previous rates hurt their profitability.
Interchange price controls have failed to accomplish their goals of reducing prices for consumers and have instead led to a reduction in financial services. Doubling down on this failed policy will only worsen consumers’ position. For both Australia and the United States, the federal government should abandon its endeavor to centrally plan the payments system and repeal the economically inane price controls.