Arizona’s House Bill 2629 is the latest attempt by state lawmakers to regulate the financial services industry in a way that would generally fall under federal jurisdiction. By selectively targeting interchange fees on sales tax, the legislation seeks to impose de facto price controls on credit card transactions without explicitly capping fees on the entire purchase amount.
While framed as a consumer protection and small business relief measure, this bill is a clever regulatory workaround that could have far-reaching economic consequences. If successful, it could set a dangerous precedent that disrupts the financial system, raises consumer costs, and disproportionately harms small businesses and financial institutions.
Avoiding Federal Preemption
Interchange fees are set at the national level and regulated under federal banking laws, making it nearly impossible for individual states to impose price controls. However, Arizona’s HB 2629 uses a creative but flawed mechanism to circumvent federal oversight by targeting only the portion of a transaction that covers sales tax. This approach exploits how transactions are processed: credit card fees are applied to the total purchase amount as a single unit, with no differentiation between product costs, sales taxes, and gratuities.
Arizona lawmakers are forcing payment networks and financial institutions into an impossible position by prohibiting interchange fees on the sales tax portion of a transaction. Since merchants cannot process transactions with separate fees for tax and non-taxable items, this reduces the overall interchange fee for the entire purchase. While the bill claims to regulate only a fraction of the transaction, it functions as a broad-based fee cap that impacts the whole financial ecosystem.
Economic Consequences
While the bill’s supporters argue it will lower costs for businesses and consumers, history shows that such policies rarely deliver on their promises. The cost burden will not simply disappear—it will be redistributed in ways that hurt both businesses and consumers in the long run.
Higher Banking Fees
Financial institutions rely on interchange revenue to fund essential banking services, including free checking accounts, fraud prevention, and rewards programs. If this revenue is reduced, banks and credit unions will likely compensate by increasing other fees, such as monthly account charges, overdraft fees, or reduced perks for account holders.
Reduced Credit Access
Just as past federal caps on debit card interchange fees led to the elimination of debit rewards programs and increased fees, a reduction in interchange revenue from credit card transactions could lead to higher interest rates or reduced credit limits, especially for lower-income consumers and small businesses that depend on credit for cash flow management.
Increased Costs for Small Businesses
While large retailers may benefit from lower interchange fees, small businesses could face higher costs in other areas. Payment processors may respond by increasing merchant service charges, particularly for companies that process lower transaction volumes, disproportionately hurting mom-and-pop shops.
Elimination of Rewards Programs
One of the most significant consequences of reduced interchange fees is the potential elimination of credit card rewards programs. 86% of credit card users currently participate in rewards programs, including cashback incentives and travel points. Interchange fees fund these programs, and if revenue is cut, issuers will have little incentive to continue offering these benefits.
Lessons from the Durbin Amendment
The adverse effects of interchange fee caps are well-documented. The 2010 Durbin Amendment, which capped debit card interchange fees at the federal level, was intended to reduce costs for consumers but instead led to widespread unintended consequences:
- A decline in free checking accounts – Before the Durbin Amendment, 60% of checking accounts were free. After its implementation, that number dropped to 20% as banks sought to recoup lost interchange revenue.
- Higher banking fees – The average monthly maintenance fee for checking accounts doubled from $4 to over $7.
- Minimal savings for consumers – The Federal Reserve Bank of Richmond found that 98% of merchants either kept prices the same or raised them after the Durbin Amendment, rather than passing savings onto customers.
Arizona risks repeating these mistakes at the state level. HB 2629 would create similar disruptions in the financial market while failing to deliver meaningful consumer benefits.
Competition Over Regulation
Instead of imposing state-level price controls that distort the financial system, Arizona policymakers should focus on encouraging competition in the payments market. Fostering an environment where financial institutions can innovate and provide alternative payment solutions is a more effective way to reduce costs for businesses and consumers.
- Encouraging Fintech Growth – Supporting emerging financial technologies that offer lower transaction costs can provide organic competition that benefits merchants and consumers without government intervention.
- Tax and Regulatory Reform – Reducing unnecessary taxes and bureaucratic hurdles on small businesses would be a more effective way to help them thrive than implementing harmful price controls.
- Transparent Merchant Pricing – Encouraging merchants to offer discounts for cash transactions or alternative payment methods allows businesses to adjust pricing based on their own needs, rather than relying on government-mandated caps.
An Alternative
Arizona’s HB 2629 represents a troubling attempt to impose backdoor price controls on the financial sector under the guise of consumer protection. The bill effectively caps interchange fees while sidestepping federal oversight by exploiting a loophole in how credit card transactions are processed. The result will not be lower prices for consumers, but instead a shift in costs that leads to higher banking fees, reduced credit availability, increased expenses for small businesses, and the loss of popular rewards programs.
Rather than following the failed example of the Durbin Amendment, Arizona should pursue market-driven solutions that promote competition, innovation, and voluntary merchant pricing strategies. Legislators should reject HB 2629 and focus on policies that truly benefit consumers without undermining the financial ecosystem that makes modern commerce possible.