By Isaac Schick, American Consumer Institute
Florida Senate Bill (SB) 564 has moved out of committee and will next receive a vote. The outcome will decide whether Republicans remain true to their free-market principles or fall for the allure of price regulation. SB 564 will compel credit card companies to change how they determine interchange fees, which a consumer’s bank charges to a merchant’s bank to cover transaction and bad debt costs. Though intended to help small merchants and consumers, SB 564 will only decrease existing transaction efficiency, hurt small merchants through high compliance costs and lower consumer access to credit and rewards.
Usually, when a consumer purchases a product from a retailer using a credit card, multiple transactions are performed instantly to validate the transfer of funds to the retailer from the consumer. The bank pays for data processors to carry out these transactions. If the consumer fails to pay his debts, the bank may incur a loss covering those funds. For these reasons, the consumer’s bank charges a fee to the retailer’s bank. The larger the transaction amount, the greater the risk to the consumer’s bank. For this reason, interchange fees are calculated as a percentage of the total amount processed.
SB 564 dictates that credit card issuers are no longer permitted to charge an interchange fee on the total price of a purchase. Instead, the interchange fee must first deduct the sales tax and then issue the fee on the lower amount. The change effectively doubles the number of transactions needed to complete the purchase. In a system where people have come to expect instant payments, every additional transaction means less efficiency. Previous interchange controls attest to this fact.
The Durbin Amendment, passed as part of the Dodd-Frank Act in 2010, limited the amount a creditor could charge in interchange fees. Though similar to SB 564 in that it controlled fee prices, SB 564 addresses how those fees are calculated without implementing an overt cap. Both policies were sold to the public with similar intentions. The idea was that lower interchange fees would save merchants money on transactions that would then be passed down to consumers. This did not occur, leaving consumer costs virtually unchanged.
Instead, the amendment placed restrictions on consumer access to credit and reward options. Approximately one million people, primarily from low-income families, lost access to banking services due to the amendment. Banks had less incentive to reward cardholders without the ability to recoup losses on credit card transactions. Popular rewards programs were discontinued as banks sought to cut expenses to maintain profitability. These changes were bad news for the nearly 90 percent of cardholders enrolled in rewards programs, including almost 80 percent of households with incomes of less than $50,000.
Even if SB 564 provides no consumer benefits, it at least saves small retailers money on interchange fees, right? Unfortunately for the bill’s proponents, small retailers do not fare any better. Since the average interchange only costs two to three percent, the amount saved from deducting the sales tax, which is seven percent on average in Florida, is minuscule for small retailers.
Justin Hof, a small business owner and the Chief Information Officer for First Commerce Credit Union, analyzed how much his business would save if the bill were to pass. He found that with $100,000 in sales tax, he would only save $400 a year. On the other hand, implementing a whole new system for determining fees would cost him thousands and increase his annual expenses for maintenance. Most of the costs for implementation remain the same regardless of the retailer’s size, if larger retailers can save more than the compliance costs due to a higher transaction volume, larger retailers would disproportionately benefit.
SB 564 will produce significant unintended consequences. Consumer costs won’t fall, but access to lines of credit and reward programs will. Any small businesses’ savings from lower interchange fees will be offset by the cost of updating equipment and increasing overhead. The only potential beneficiaries of this bill are large retailers. Policies to control how creditors price their fees have already been shown to have these effects. There’s no need for Florida to become another case study.
Isaac Schick is a policy analyst at the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org or follow us on Twitter @ConsumerPal.