Sen. Dick Durbin (D-IL) introduced legislation earlier this year proposing new credit card regulations that would function as caps on consumer discounts. Republicans should recognize this legislation for what it is and resist regulatory attempts by merchant associations to undermine the rewards and protections that credit card networks have negotiated for consumers.

The deceptively named Credit Card Competition Act of 2023 would extend the Durbin amendment of the Dodd-Frank Act from debit cards to credit cards. It is designed to limit so-called interchange “fees” that are better understood as consumer discounts that merchants must extend to their customers who use credit cards.

Credit card companies run cash-back and reward programs and provide consumers with valuable services such as fraud protection and instant access to credit. As a result, the credit-card consumer gets a better deal than the cash customer at the same merchant because only the former receives the benefits of what the credit card companies provide.

Merchants help finance these consumer benefits through the interchange fees. The more consumer benefits that are financed through the interchange system, the greater the discount that merchants are providing. That’s competition! Thanks to the interchange system, spending enough at Walmart with your United Airlines card not only provides you with the merchandise but also an upgrade to first-class airfare.

Each card issuer puts its card on one of the four networks (Visa, Mastercard, Discover, or American Express) that collects the fee and processes the transactions. Issuers who want to provide larger consumer benefits sign up for the network with greater fees that could finance those benefits. Because networks need both issuers and merchants to participate, they set fees to balance the competing interests.

Each merchant has the option to decline credit card payments to avoid interchange fees and recommend alternative payment methods, such as the debit cards whose fees are already capped due to the 2010 Dodd-Frank Act. They could also try instead to attract consumers with lower prices.

But merchants typically acquiesce to the fees because they understand that many of their customers prefer credit cards to debit cards, checks, and cash. Accepting credit cards also helps the merchant make up for the fee on greater volume.

Merchants might consider colluding to refuse credit cards with interchange fees that are “too high” (that is, provide too many benefits to consumers), but that might be illegal. What is perfectly legal is for merchants to ask Congress to undermine competition on their behalf, as the Illinois Merchant Association has done with the Credit Card Competition Act.

Earlier versions of the act simply capped the credit card fee — an obvious price control. As explained in the Wall Street Journal, previous price controls like this have proven “a disaster for consumers [and] a windfall for mega-retailers like Walmart, Amazon and Target.”

But Durbin has convinced some Republicans to sign on to a new version of the bill by disguising the price control as a “routing mandate.” The mandate would allow merchants to select the network, rather than the issuer. Networks would have no choice but to cater to merchants, who would rather not grant consumer discounts. This would begin the death spiral for the reward programs and fraud protections that consumers love and have passed the market test.

Some believe that card-network profits are too high because there are “only” four networks competing. Perhaps a well-designed regulation could enhance competition in the network market, where annual profits for issuers are on the order of $10 billion. But even a slight regulatory tilt in favor of merchants would undermine competition in the multitrillion -dollar merchant market, overwhelming any benefit in the form of network competition.

Our First Amendment allows Durbin and his allies to mischaracterize interchange fees as “a hidden tax.” If only we had more such taxes that delivered revenue to consumers rather than special interests.

Casey Mulligan is an economics professor at the University of Chicago, a fellow with the Committee to Unleash Prosperity, and was the chief economist of the White House Council of Economic Advisers from 2018 to 2019.