For 20 consecutive years, the Lone Star State has been the top destination to operate and conduct business in the country, at least partially due to a light-touch regulatory environment consistent with the free market. However, a series of proposed laws surrounding transaction fees for purchases (SB 2056/HB 4061 and SB 2026/HB 4124) goes against that grain.
These proposed laws are not aligned with our current payments system, which doesn’t separate the sales tax portion of a transaction when a customer uses a credit or debit card to make a purchase. To comply with these bills, businesses would have to invest in new, costly point-of-sale payment systems, including hardware and software that can separate out the sales tax portion of every transaction.
Large retailers can afford to implement these new payment systems, but for small businesses, the cost of implementing them will be substantial. In a state where 99 percent of businesses are considered small businesses, these implementation costs could significantly impact their viability and operations.
According to a study commissioned by Americans for Free Markets (AFFM) and conducted by my firm, TXP, Inc., there would be an estimated $251.8 million reduction in interchange fees paid by those businesses who pay sales taxes to the state of Texas. Twenty of the largest retailers in the country, like Amazon, Walmart and Home Depot, would receive more than 40 percent of those savings, with an average of over $5 million each.
For small businesses, their average savings would be an estimated $243 each — and that’s before factoring the cost of implementing new payment systems, which would cost an average of $2,340 annually — or roughly 10 times the potential savings — to comply with the hardware and software upgrades required by these laws. Hardware costs can be as high as $2,000 while point-of-sale (POS) software can vary, ranging from $20 to $250 for monthly subscriptions. Some POS systems combine the hardware and software for a one-time purchase, which can cost more than $10,000. And these costs are in addition to installation fees and other variables like online ordering integration or advanced inventory management.
Even if the proposed legislation resulted in marginal savings for small businesses, any savings would be outweighed by the price of implementation, resulting in net costs, not savings, that will then very likely be passed on to Texas consumers.
Similar prohibitions on interchange played out before at the federal level and failed: after Congress passed an amendment to the Dodd-Frank Act in 2011 capping debit card interchange fees, only one percent of businesses reduced their prices. Instead of saving money, consumers lost access to debit card rewards programs and free checking accounts, all while witnessing higher minimum balance requirements and higher fees after banks took measures to offset the impact of the regulation.
It’s likely to expect retailers to react the same way if these Texas laws were implemented. Card issuers would have less revenue from interchange payments that fund credit card services, including rewards programs and fraud protection measures. The result of these proposed laws would be reduced card services and higher operating costs for businesses, particularly small businesses that can’t afford to shoulder the financial burdens that larger businesses can.
Texas is the 8th largest economy in the world. Lawmakers should consider the impact of these proposed interchange laws on economic progress, small businesses, and the free market principles that have made Texas both a national and global destination to conduct business.
Jon Hockenyos is the president of TXP, Inc., an economic analysis and public policy consulting firm based in Austin, Texas.