More on Interchange Fees

From: The Atlantic

by Megan McArdle

Apologies for the absence–I was wrestling with a column yesterday.  Luckily, this seems to have given you lots of time to comment on earlier threads, particularly the one on interchange fees.

That gives me a lot to respond to.  Let me see if I can hit the main points on interchange: 
1.  Debit cards are regressive; merchants charge slightly higher prices, which hurts people who pay cash.  True, but trivial; you need a fairly elastic definition of the word “hurts” to care about this.  We’re talking about a transfer of, at most, tens of dollars a year.  There are lots of such transfers in the retail community: those who buy small amounts cost more than those who buy lots; those who park cost more than those who walk; those who use coupons and hunt for sales cost more than time sensitive shoppers who buy whatever they happen to want.  As I asked before the amendment passed last year: shall we also outlaw Costco because the urban poor do not have SUVs, spacious pantries, and large chest freezers in which they can store their warehouse club bounty?
You do not slap a price control on an otherwise functioning market because the poor might pay, over the space of a year, $20 more for food.  If this is a real problem, you increase the damn EITC.  (As maybe we should anyway).
Moreover, this was a bit rich coming, as it usually did, from the retail lobby.  I find it hard to believe that merchants were spending millions of dollars lobbying because they wanted so badly to pass their interchange savings onto the deserving poor.  I rather suspect they were hoping to pass the interchange savings onto their bank accounts.
There’s evidence for this, by the way: according to the GAO, when Australia slapped price controls on their interchanges, there’s no evidence that prices went down.  Of course, you can handwave and say that well, maybe there was a lot of other stuff going on and we couldn’t detect the effect, but here’s the problem with that:  if we couldn’t detect it, that means that the effect was very small. And we should probably shy away from enacting regulations to achieve ends that are undetectably small.  
To add insult to injury, switching from interchange fees to higher bank account and debit card fees is hardly a progressive change.  People with comfortable balances and good credit will either get free checking, or they’ll use credit cards.  Lower balance users with worse credit (read: poorer people) will pay the fees.
2.  You’re asking merchants to subsidize your free checking and air miles.  Talking about who subsidizes who is pretty much meaningless in a two-sided market, which is what credit cards are: they need to attract both consumers and merchants.
 Do magazine subscribers subsidize corporate advertising, or do advertisers subsidize magazine reading?
What pisses off merchants is that they also need to attract consumers, which means they have to accept credit cards, which means that the fees for supporting the payment system come mostly out of their pockets.  I probably wouldn’t like it much either, but the fact that Harris Teeter and Wal-Mart have to pay for the fixed costs of operating a payment system, rathe than Ma and Pa Middle Class, does not strike me as some sort of cosmic injustice in urgent need of federal remedy.
3.  The new system is more transparent.  This is, to me, a frankly bizarre argument.  A cap on debit interchange fees is a price control, not a transparency initiative.  There is a reason that very few transparency advocates focus their energy on slapping price controls on everything in sight.
I mean, sure, if you set the price of bread at the wholesale cost of a loaf of bread, stores would carry a lot less bread, which would certainly show people how little interest stores have in selling products at a loss.  And there would probably be lines for bread, which would certainly be very intrusive and obvious to everyone, rather than the “hidden subsidies” for store lighting and shareholder dividend payments that used to be folded into the price of bread.  And if you did this for all the goods in the store, then you’d probably have to pay a fairly hefty admission fee to get in the store, or a fat fee for parking, or something that would cover all the fixed costs of operating the store and attracting customers and so on.  This would certainly make it clearer to customers how much it costs to operate a store.
But this would not be a blow for transparency; it would be a gross market distortion.
To apply this to a two sided market: if you fixed the cost of advertising at slightly above the physical cost of printing an extra page, magazines would lose a lot of revenue.  And obviously, they would have to make the costs up somewhere, presumably by raising subscription fees.  But this wouldn’t be “more transparent” in any interesting sense, even though yes, it would make many customers much more aware of the costs of running a magazine.  It would just be an elaborate way to put most magazines out of business.
4.  It’s only disgusting big banks who don’t care about their customers who are slapping on these added fees; smaller banks and credit unions didn’t do it, so the fees must just be a cynical ploy by greedy bankers, rather than an actual effect of the Durbin amendment.
Ahem.  The reason that credit unions and small banks are not slapping higher fees on their account holders is not that they are kinder, more considerate folks who only have the best interests of their customers at heart.  Rather, they were exempted from the caps on interchange fees.
Moreover, if all of us did as some of my readers have urged, and switched our custom to smaller banks, this would entirely undo the alleged point of the Durbin amendment, was to lower the interchange fees that retailers are paying.
5.  Retail is more competitive than banking, so more of the fees will get passed through.  Argument by assertion.  Neither commercial banks nor retail operations compete entirely on price, but my understanding is that retail banking in the US is pretty competitive.
Moreover, well over half of the fees supposedly go to cover either rewards, or the transaction costs of bank accounts and payments, according to a report frequently cited by supporters of Durbin, so the merchants would have to be passing through almost all of the savings in order to make this a better deal for customers.  Even if you allow some higher benefit for cash over air miles, I don’t think you can allow much, because so many rewards these days are . . . cash back.
How likely is it that they’ll be passing through the vast bulk of the gain? Well, remember that merchants have three or four classes of customers: credit, cash, check, and debit.  The fee cap is not going to deliver a huge savings on every transaction; just substantial discount on a fraction of them (and not even that, if the lower interchange fees push people onto credit cards, or into credit union accounts where the fees aren’t capped).  
I expect that this fragmenting of payments is going to significantly reduce the competitive pressure to distribute the gains to consumers, since we’re talking about something less than a penny off for every dollar in the price of a product.  Most debit card purchases are not $800.00 flat-screens; they’re gallons of gas and cartons of milk. Maybe gas stations will feel compelled to give you that half a cent per gallon; it’s one of the most competitive commodities on the market.  But for things like groceries and drugstore items, I’m skeptical.


In Battling Merchants, Banks Still Hope to Overturn Durbin Rules

From: NYT


The Durbin Amendment — the legislation that limits the fees banks can earn for debit card transactions to a scale that is “reasonable and proportional” — was signed into law more than a year ago. It survived the financial sector’s strong objections to the Federal Reserve’s aggressive first swing at regulating those fees, as well as subsequent efforts in Congress to delay adoption of the new rules. Those new rules, which were eventually watered down in a compromise that left advocates fuming, took effect Oct. 1.


Bipartisan House Bill to Repeal Durbin Amendment to Be Introduced

From: Credit Union Times

By David Morrison

Two legislators have announced they will file a bipartisan bill in the U.S. House of Representatives to repeal the Durbin amendment and remove its cap on debit card interchange for debit issuers of over $10 billion in assets.

U.S. Reps. Jason Chaffetz (R-Utah) and Bill Owens (D-N.Y.) said their measure “would restore balance” to the electronic payments system.

“This is a perfect example of the dangers of price controls and the inefficiency of government intervention in the free market,” Chaffetz said.


$5 Debit Card Fee: Don’t Blame Banks — but Durbin, Dodd, Frank, the Fed

From: The New American

Written by Bob Adelmann   

On Thursday, Bank of America announced that, starting the first of the year, they would be charging debit card users $5 a month for the privilege as a way to recoup lost income under new rules from the Federal Reserve. The rules, which took effect on Saturday, October 1, limit the amount banks may charge merchants accepting debit cards to 21 cents per transaction, down from 44 cents previously. Under the Dodd-Frank bill passed in 2010 — initially proposed by former Senator Chris Dodd (D-Conn.) and Representative Barney Frank (D-Mass.) — banks processing the transactions will see their income from those fees drop by about $10 billion a year, all in the name of fairness and equity, according to the Federal Reserve, which determined that the new fees are “reasonable and proportional.” According to industry sources, the real cost of handling each debit card transaction amounts to “a penny or two,” and so politicians decided this called for action. 

One of those was liberal interventionist Senator Dick Durbin (D-Ill.), who sponsored the swipe fee amendment, saying,
It seems that old habits die hard for Bank of America. After years of raking in excess profits off an unfair and anti-competitive interchange system, Bank of America is trying to find new ways to pad their profits by sticking it to its customers. It’s overt, unfair and I hope their customers have the final say.
Earlier this year the Federal Reserve determined that the interchange fees Visa and MasterCard fix for big banks grossly exceed the cost of processing a debit card transaction by some 400%. These hidden fees were designed to boost big-bank profits by charging small businesses and merchants every time a debit card was swiped. And profit they did. Bank of America hauls in billions in debit interchange each year.
Thankfully, on October 1st that flawed system will be replaced by a more transparent and competitive market. Swipe fee regulation will still allow banks to cover the actual costs of debit transactions but will rein in the banks’ excessive profit-taking. Small business and merchants will benefit from fee relief and consumers will benefit from lower prices. And banks that try to make up their excess profits off the backs of their customers will finally learn how a competitive market works.
It’s obvious that interventions into the marketplace by government officials who are seeking “sound bites” and votes always have unpredictable and unintended consequences. Usually costs for consumers go up. Once Dodd-Frank was implemented and it was clear that one source of income was going to be restricted, banks began to look for other ways to offset those declines. Some severely restricted customer reward programs, while others increased ATM fees and overdraft charges. Several banks did trial runs at raising debit card fees, including JP Morgan Chase and Citigroup, but Bank of America, the country’s largest bank by deposits, was the first to formally announce its nationwide intention to start charging after the first of the year. 
A close look at Bank of America’s numbers is revealing. Assuming that most of B of A’s 58 million customers have and use a debit card at least once a month, making a projected $260 billion in purchases next year, the bank will reap about $3 billion a year in new revenue, or about $1 billion more than what they are currently making from those transactions. But that’s only the beginning. Because so many customers had been using the fee-free debit cards, many will be switching back to using credit cards, which are even more profitable for the bank to process, especially as most balances aren’t likely to be paid off at the end of the month. So it’s a win-win for the bank and lose-lose for the consumer. 
There are options for the consumer, including writing checks or paying cash to avoid the new fees. And since the new rules apply only to banks with more than $10 billion in assets, smaller banks may still offer fee-free debit cards. 
Among those complaining about the new fees is Norma Garcia, a lawyer for Consumer Reports, who said, “I’m not making business decisions for B of A, but I can only say from a consumer perspective, consumers are tired of being nickel and dimed.” This is typical of hypocrites who have pushed for years for more and more government intervention by the government into places where it doesn’t belong, and then blamed the consequences on the wrong party. But Garcia wasn’t nearly as off-base as was Durbin in his exclamatory remarks that “banks that try to make up their excess profits off the backs of their customers will finally learn how a competitive market works.”
Durbin has no idea how a competitive market works, because he never saw one that didn’t deserve government intervention. With a Freedom Index rating of just 10 (out of 100), he hasn’t the first clue about limiting government to the constraints of the Constitution which, if they were followed, would in fact allow the competitive market to work for the benefit of the customer and help bring their transaction costs down. But with government intervention, in debit cards as in nearly everywhere else, the customer gets to pay and pay and pay. While the big banks share the blame for the new fees, let’s not forget the real interventionists themselves: Durbin, Dodd, Frank, and especially the chief enabler of all, the Federal Reserve.