You’ve likely heard the term swipe fees or interchange fees regarding the use of debit cards and credit cards. In short, interchange fees are small fees merchants pay to card companies or banks for the ability to accept card payments and use their network. The fees cover everything from data security to points programs. For example, if you’ve ever had a fraudulent purchase show up on your account and contacted your bank, they likely refunded your money and issued you a new card for free. You have probably also had your bank contact you over suspicious activity on your card, possibly preventing a large fraudulent purchase on your account. Those services are free to you in large part due to interchange fees.   

Specifically for debit cards, interchange fees also helped pay for free checking. Before the Dodd-Frank banking reform bill in 2010, they also paid for debit card rewards programs. Most of us barely remember that debit cards used to have rewards programs. That is because once Dodd-Frank was signed into law, it placed a government-enforced cap on debit card interchange fees which, among other things, effectively eliminated the reward programs completely.

If you’re comfortable with the government setting prices for goods and services, a cap on a fee that is paid to a bank doesn’t sound so bad. You would assume (or at least hope) that lower fees paid by merchants would lead to lower costs on the things we buy from those merchants. In fact, when lobbying for the bill back in 2010, that’s what big retailers like Home Depot promised to do. Unfortunately, but not surprisingly, that’s not what happened.

The Dodd-Frank bill passed in July of 2010. In February 2011 Home Depot’s CFO reported to shareholders that the new law increased the company’s profits by $35 million. As suspected, none of it was passed onto customers. In fact, according to the Federal Reserve Bank of Richmond, 21% of merchants actually increased their prices after the rule went into effect.

You’re probably thinking that Home Depot making money at the expense of Visa or a big bank like JP Morgan doesn’t make much of a difference to you. Neither of those companies are hurting for money. But the true effect of that provision of Dodd-Frank – often referred to as the Durbin Amendment – was that it increased costs on banking products and jeopardized data security for your accounts.

Last year the Government Accountability Office further determined that the Durbin Amendment has caused significant damage to checking account access. According to a Federal Reserve study, following the passage of Dodd-Frank, free checking for lower-income families drastically declined and monthly fees on checking accounts increased. Debit card points programs disappeared, and because data security was instantly underfunded, fraud risk spiked. What seems on the surface like someone else’s problem quickly impacted millions of Americans with absolutely no benefit.

Despite all of that, the Federal Reserve is working on a rule that would further cut interchange fees and the services they provide. There is also a bill, the so-called Credit Card Competition Act, that would place similar restrictions on credit cards.

I will soon be introducing a bill to stop the Fed’s disastrous plan, and I’ve been actively fighting the bill to cut credit card services. Both efforts have supporters who claim they’ll somehow help everyday people. You may have even seen ads on TV for it, but the facts prove they will achieve the opposite.

If you do hear about this, please consider two things. First, why would we, as a capitalist, free-market society, want the government to dictate the terms of private market contracts and negotiations?

Second, if there is no way to pay for data security or to refund your money after a fraudulent charge how are you going to get your money back? Will you have to simply accept the loss or take a big company like Home Depot to court?

Two very bad options based on two very bad ideas.

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