State Payment Card Price Controls Would Raise Costs for Consumers

The Center for a Free Economy submits these comments in support of the Office of the Comptroller of the Currency’s interim final order concluding that federal law preempts the Illinois Interchange Fee Prohibition Act.

The OCC is right to act. Illinois is attempting to impose a state-level price control on the national payments system by prohibiting national banks and federal savings associations from charging or receiving payment card fees on the tax and gratuity portions of payment card transactions. The law also restricts the use of payment card transaction data. Both provisions interfere with a national banking and payments framework that cannot function under a patchwork of state-by-state mandates.

Payment card fees are market prices. They are the fees banks and credit unions charge retailers and other credit and debit card users for the convenience, security, and reliability of using payment cards. These fees are negotiated among the parties involved and are subject to contract, competition, and renewal.

Government should not use price controls to reward or punish one side of that negotiation. When government sets prices in private markets, it distorts the free flow of capital, changes private incentives, and pushes costs elsewhere. Consumers often pay for those distortions through reduced benefits, higher costs, or fewer services.

The experience with debit card price controls offers a clear warning. Federal debit card fee caps helped lead to the death of many debit card rewards programs. Government did not make those costs disappear. It shifted them, and consumers lost benefits that had existed in a more competitive market.

The Illinois law repeats the same mistake at the state level. It assumes lawmakers can carve out one portion of a payment transaction and micromanage the price attached to it without affecting the broader system. Payment card transactions depend on authorization, fraud prevention, settlement, dispute resolution, data security, and compliance systems that operate across state lines.

This policy area is not the proper purview of the states. Credit and debit card transactions routinely cross state lines, involve national banks, rely on national networks, and serve consumers and merchants through a national payments system. Interstate commerce is exactly the kind of subject the Constitution assigns to the federal government. The Founders understood that commerce crossing state lines required national rules, not conflicting state commands.

A state-by-state approach would invite serious harm. If Illinois may impose its own payment card fee restrictions, other states may impose different restrictions of their own. Banks, credit unions, payment networks, processors, retailers, and consumers would then face inconsistent rules for transactions that are national in practice. That would raise compliance costs, increase uncertainty, and weaken the reliability of the payments system.

The data restrictions in the Illinois law create additional problems. Payment card transaction data supports fraud prevention, consumer protection, dispute resolution, compliance, and system security. Restricting the use of this data by state mandate would make payments less secure and less efficient, not more fair.

Supporters of the Illinois law present it as relief for merchants and consumers. That argument ignores the basic economics of price controls. Government cannot eliminate the cost of payment services by banning a fee on part of a transaction. It can only force the cost to reappear somewhere else.

The OCC should finalize and maintain its order. National banks and federal savings associations should not be subject to Illinois’ attempt to regulate payment card fees and payment data through a state law that conflicts with federal authority and threatens the national payments system.

The Center for a Free Economy urges the OCC to reaffirm that federal law preempts the Illinois Interchange Fee Prohibition Act and to prevent states from undermining interstate commerce through fragmented price controls on payment card transactions.