The use of the phrase “unintended consequences” when discussing proposed legislation has become almost cliché, and yet it remains an incredibly useful and accurate phrase to describe the effects of bills that may be unforeseen to proponents but which are no less real. HB25-1282 is the type of bill for which that phrase is meant for.

A recent op-ed suggests that HB25-1282 — which, among other things, would place artificial limits on credit card interchange fees and eliminate them in specific transactions — would save small businesses money. Unfortunately, while it may be well-intentioned, the bill has several inherent flaws which, instead of saving consumers and small businesses money, will in fact cost them far more in the long run. Limiting credit card fees may sound good in theory, but in practice will cause significant harm to small businesses and consumers alike. 

It is important first to understand what interchange fees are and what they are for. Like any product or service, there are costs associated with providing credit cards and making purchases with them. Every time you make a payment with a credit card, there are costs associated with processing that transaction, protecting the information on the card, and providing consumer benefits, such as reward points. The fee that is charged with each use of the card — the interchange fee — goes towards covering those costs of the processing, fast transfer of funds to the merchant, stringent back-end security and cardholder benefits that make modern electronic payments and purchases convenient and safe. Accordingly, limiting or erasing those fees may bring some savings to large retailers, but that will come with negative impacts for everyone else. 

The first risk of this bill is the threat to consumer rewards. Credit card reward programs, such as points and travel miles, are an important financial benefit for many Coloradans. Furthermore, Colorado ranks fourth nationally as a destination for reward point redemption. The passage of HB25-1282 could result in fewer benefits — or even the complete elimination of such programs — by limiting the interchange fees that help fund them.

Many Coloradans rely on these reward programs. Of course, this will also have a severe impact on the industries and businesses around the state that rely on tourist dollars. When restrictions on debit card interchange fees went into effect, reward programs tied to debit cards were revoked; the same is expected to happen for credit cards should this bill become law.

HB25-1282 includes a ban on charging interchange fees on taxes and gratuities. Should the bill become law, the most likely outcome will be that tips and taxes will be required to be paid by cash or check. It is unrealistic to assume the financial industry will cover the cost of processing, the fraud risk and the credit risk without compensation is unreasonable.

There is no need for this: Merchants are already permitted to add a surcharge to transactions to cover the cost of interchange. Merchants can already require the taxes and gratuities to be paid in cash. Colorado small merchants are given a vendor fee from the state to compensate them for collecting and submitting taxes.

It is doubtful that taxes paid to local and state governments would be paid by card. Again, the bill would require that financial institutions accept all the fraud risk and credit risk and process the transaction without compensation. It is highly unlikely they will.

The bill lowers permissible interchange that can be charged in a charitable transaction to a fee so low that it is unlikely the charitable contribution would be accepted by card if the bill becomes law. This will reduce the amount of charitable contributions made.

Finally, among the most significant concerns with HB25-1282 is the potential for costly legal battles. A similar law passed in Illinois is facing major legal challenges. A federal court subsequently granted injunctions that exempt national banks and financial institutions from state-imposed fee limitations. If HB25-1282 passes, Colorado could soon find itself embroiled in expensive litigation, wasting taxpayer dollars to defend a law that may violate federal statute and ultimately prove unenforceable. Colorado taxpayers could end up footing the bill for a costly legal battle with little to show for it.

The bottom line is that HB25-1282 does more harm than good. While presented as a solution, the bill fails to account for the full range of consequences it will leave in its wake. This bill would drain taxpayer dollars through costly legal battles, disrupt transactions, complicate the payment process and eliminate valuable consumer rewards programs. In the long run, it will — unintentionally — harm the very groups it seeks to protect.