Jess Ward and Mattias Gugel: Pa.’s swipe fee cap — more harm than good for small businesses

The latest legislative misstep in Pennsylvania, HB 2394, aims to prohibit financial institutions from charging interchange fees on the sales tax portion of credit card and debit card transactions. While the intent to lower business costs is laudable, the execution is as ineffective as a Hershey’s chocolate teapot.

Lawmakers are seeking to reduce costs by capping swipe fees through regulatory measures and arbitrary price controls. The goal? To make purchases more affordable during our current bout of inflation. Noble, yes, but in reality, this is a classic case of the cure being worse than the disease. This bill would create more problems than it solves, leading to unintended consequences that would trip up business owners and consumers.

Let’s begin talking about interchange fees. These are not nefarious plots concocted by financial institutions to squeeze every last penny out of you. They are a crucial part of the economic ecosystem, determined by payment networks to cover the costs of transaction systems. Disrupting these fees could destabilize market dynamics. Transaction systems typically recognize the total purchase amount without excluding components such as sales tax.

Tinkering with this balance is akin to pulling a thread on a finely woven tapestry — everything unravels. Take, for example, the thriving small businesses in Philadelphia’s historic Reading Terminal Market. These merchants rely on smooth transaction systems to process thousands of sales daily. If HB 2394 disrupts this balance, it could create a cascade of issues, leading to higher costs and inefficiencies that could strain these beloved local institutions.

Furthermore, imposing state-level caps introduces a complex regulatory landscape. Picture a maze, but not the kind you see at fall festivals. This maze comes with business challenges and potential inefficiencies that could drive business owners to tears of frustration. Consider a family-owned hardware store in Scranton, already juggling the challenges of supply chain disruptions and inflation. Adding a convoluted layer of state-specific regulations could be the straw that breaks the camel’s back.

Capping fees may sound like a win for merchants, who then could theoretically pass on savings to consumers. But don’t start celebrating just yet. This move could also reduce consumer benefits and options. Credit card rewards programs? They could be the first casualty, as cutting interchange fees means less money for these incentives. And who doesn’t love those little perks?

But the plot thickens. Interchange fees fund more than just rewards programs; they bankroll critical services like fraud prevention. These fees ensure you’re not left footing the bill when your credit card information falls into the wrong hands. Imagine the chaos if payment networks lacked the funds to keep up with security measures in our ever-evolving digital landscape. Capping these fees could stymie innovation and security, posing long-term risks to consumers and businesses.

Consider Pittsburgh’s burgeoning tech scene, where startups rely heavily on secure, efficient payment processing to drive innovation. If HB 2394 stifles payment networks’ ability to invest in new technologies and security enhancements, it could slow down the growth of this vital sector.

Let’s not forget the strain this legislation would place on the relationships between merchants and payment networks. It’s like throwing a wrench into a well-oiled machine, reducing the acceptance of certain payment methods and increasing costs for other financial services. The free market thrives on balance, and HB 2394 is a hefty sledgehammer aiming to smash that balance to smithereens.

The bill’s attempt to impose price controls on the sales tax portion of transactions is nothing short of government overreach. There may be valid reasons to regulate interchange fees, like protecting consumers and ensuring fair competition. But let’s be honest — states should carefully consider the broader implications and collaborate with federal regulators and industry stakeholders to achieve balanced outcomes. Furthermore, if lawmakers are genuinely concerned about the cost of processing fees on the sales tax, they should look at ways to lower the tax rather than meddling with how citizens pay for goods and services.

In short, this proposal is a legislative misadventure that does more harm than good.

Pennsylvania lawmakers should oppose this bill and stand with business owners and consumers who will bear the brunt of its unintended consequences. After all, the road to economic turmoil is paved with good intentions — and poorly thought-out legislation.

Jess Ward is senior director of state affairs and Mattias Gugel is director of state external affairs for the National Taxpayers Union.