Another day, another example of government’s determined effort to fix what isn’t broken. This time, the meddling takes the form of price controls on credit card interchange fees—a term most consumers don’t think about, but one that keeps the wheels of commerce turning.
State legislators across the country, keen to show they can solve problems that don’t exist, have decided to cap these fees, believing, in their wisdom, that they can dictate market prices without consequence.
Spoiler Alert: Consumers Still Pay the Price
Let’s be clear: capping interchange fees won’t lower costs for consumers. The theory is that if businesses pay less in fees, they’ll pass the savings on in the form of lower prices. A nice thought. But businesses don’t operate out of charity, nor should they.
What actually happens is that businesses keep the savings—because that’s how markets work—while banks, suddenly deprived of a revenue stream, shift the costs elsewhere: higher annual fees, reduced rewards, fewer perks, and more expensive banking overall. The consumer, in the end, pays.
And we’ve seen this before. When Congress passed Dodd-Frank in 2010, they decided banks were making too much money on debit card transactions and set limits. The result? Banks adapted. Free checking accounts became rare, minimum balances increased, and the cost of banking became more prohibitive for low-income Americans. Meanwhile, the promised consumer savings never materialized. Instead of learning from that failure, states are now marching toward the same trap, this time under the guise of helping small businesses.
Big Business Wins, Main Street Loses
Here’s where the story gets worse: The big guys will be fine. They have the leverage to negotiate and shift costs. But the mom-and-pop hardware store or the family-owned diner? They’ll be the ones scrambling. Their costs will go up, their access to affordable credit will shrink, and their ability to offer convenient payment options will diminish. They may even have to upgrade their point-of-sale systems to comply with new regulations—an added expense in an already challenging economy.
But that’s just the start. According to a study by Common Sense Colorado, a policy to ban these fees could slash job growth in Colorado’s retail sector by nearly 76% over five years—yes, you read that right. The total economic damage? A $1.4 billion hit to the economy, with personal incomes dropping by over $1 billion. Meanwhile, the supposed “savings” for merchants wouldn’t even come close to covering the damage. Over five years, they’d save just 0.07% of total taxable sales—pennies compared to the economic wreckage left behind.
And while the big-box retailers will weather the storm, smaller businesses—the ones that rely on frequent, low-cost transactions—will get squeezed the hardest. Local banks and credit unions will also take a significant hit, leaving fewer options for small businesses to secure affordable credit. Fewer competitors mean higher costs in the long run. Once again, small-town America loses, while the government pats itself on the back.
The Free Market Already Has This Handled—Thanks
And let’s not forget consumer rewards programs. Those generous credit card points, travel benefits, and cashback offers that suburban moms love to rack up for groceries, flights, and holiday shopping? They don’t exist in a vacuum. They are funded in part by interchange fees. Reduce the fees, and those perks disappear. Average consumers, thinking they’re gaining some savings at the register, will soon realize they’ve lost far more in the long run. This isn’t just speculation; we saw it happen when similar regulations hit debit card fees. Rewards vanished, and banks looked elsewhere for revenue. The same will happen here.
But the most baffling part of this push is the utter disregard for basic free-market principles. Merchants and banks negotiate these fees. If a store dislikes the cost of accepting credit cards, it can offer cash discounts, switch to a lower-fee processor, or find alternative payment methods. That’s how competition works. But no, some lawmakers can’t resist the urge to intervene—to insist that they, rather than the market, know best. History tells us what happens next: businesses and consumers lose, while bureaucracy expands, convinced of its own necessity.
The bottom line is this: capping interchange fees won’t make goods cheaper. It will kill job growth, shrink small business profits, weaken fraud protections, make banking more expensive, and eliminate consumer rewards. It’s the worst kind of regulation—one that disrupts a functioning system for the sake of political grandstanding.
States eager to embrace this policy might as well bring back dial-up internet and mandatory video rental late fees while they’re at it. We’ve been down this road before, and we know where it leads. The real question is: Why are we so eager to relive the failure?