The New Debit Card Regulations : Effects on Merchants , Consumers , and Payments System Efficiency

Public authorities have recently intervened in the U.S. payment card industry to address controversy over the growing fees charged to merchants for processing debit card transactions. The interventions, by Congress and by the Department of Justice, aimed to give merchants and consumers some relief from the high fees and to promote competition within the payment card industry. The new regulations cap certain fees and give merchants more control in routing debit card transactions and in steering customers toward the payment methods that merchants prefer. Merchants and the payment card industry took opposing sides in the controversy over fees. The merchants argued that lowering the fees through regulation would benefit consumers because the high fees charged to merchants were imposing costs on both merchants and consumers and reducing the efficiency of the nation’s payments system. In the merchants’ view, the high fees reduced consumer welfare because part of the burden of the fees was passed on to consumers in the form of higher prices for goods and services. Overall payment system efficiency was reduced according to the merchants because the payment card industry used some fee revenue to sustain inefficient payment methods that yielded the industry the most revenue.