Today is the day, as a bipartisan amendment comes to the Senate floor delaying draconian price controls on debit card transaction fees from Dodd-Frank’s Durbin Amendment, that the Senate has an opportunity to save consumers, community banks, and credit unions from a train wreck that will have a more direct effect on their finances than the much-hyped debt ceiling default.
In voting this afternoon on a one-year delay of the Durbin Amendment and study of its effects on consumers and small banks and credit unions, sponsored by Sen. Jon Tester (D-Mont.) with Republican such as Sen. Jon Kyl (R-Ariz.) signing on, the Senate also has the opportunity to save the retail industry from shooting itself in it collective foot with its massive but short-sighted lobbying effort to keep these price controls in place. With the Durbin Amendment mandating below-cost price caps of no more than 12 cents for the interchange fee, or swipe fee a merchant groups call it, that banks will be able to charge retailers to process debit card transactions, Washington has — in the words of syndicated columnist Deroy Murdock — “declared war on debit cards.”
But even though this war was instigated by big merchants such as Wal-Mart, Walgreens and Home Depot and retail trade association such as the Retail Industry Leaders Association and Food Marketing Institute, retailers themselves are going to be among the casualties of this war as the debit card system slows down and even breaks down due to the ill-effects of the Durbin price controls. New developments show that both consumers and retailers, particularly smaller ones, will lose.
Federal Reserve Chairman Ben Bernanke recently told the Senate Banking Committee that the Durbin 12-cent price caps, which will reduce interchange revenue for banks and credit unions by a much as 90 percent, “could result in some smaller banks being less profitable or even failing.” These failures may not hit the Wal-Marts or Walgreens that can borrow anywhere, but since smaller retailers typically borrow from community banks, their ability to get credit will be affected.
Also, recent data breaches at Sony and Michaels craft stores specifically involving debit cards illustrate that investment in data security is paramount, and that anything that reduces this investment will hit the retail industry hard. These firms urged the debit card holders who may have been affected to contact their banks and credit unions that issued the cards.
In return, as noted by Wisconsin Credit Union League CEO Brett A. Thompson, the financial institutions “had to determine which states were involved, monitor potentially compromised accounts, manually reduce limits for both ATM and PIN transactions, monitor ATM transactions in the affected states, notify debit card holders of potential fraud on their accounts, issue new debit cards to those whose accounts were compromised and refund money to fraud victims.”
I have written in OpenMarket and elsewhere about how this measure inserted with little debate into Dodd-Frank by Senate Majority Whip Dick Durbin (D-Ill.) is basically mandating a transfer of these substantial costs for processing debit cards from the retailer to the consumer. And how many consumers will lose their free checking and debit card rewards and get hit with other fees to pay this cost. These costs to consumers are already accelerating as we get close to Dodd-Frank’s July 21st deadline and both national and regional banks are eliminating completely debit card rewards. SunTrust specifically cited the Durbin price controls as the reason it was ending the program.
But there are only so many costs that can be transferred to consumers, and merchants are likely reap what they’ve sown in terms of both the quantity and quality of services from financial institutions in debit card processing, which will slow down sales and enable more security breaches. Shortages are an outcome of all price controls that act as price ceilings. As the great free-market economist Thomas Sowell writes in his book Basic Economics, price ceilings mean “less is supplied at a lower price than at a higher price — less both quantitatively and qualitatively.”
In addition, smaller retailers and other small entrepreneurs will suffer for the same reason consumers do. They make purchase with debit cards and checking accounts in addition to accepting them as forms of payments. So they may lose their free checking and business debit card rewards, which are often more lucrative than consumer rewards. A study coauthored by Robert Litan, vice president of the respected Kauffman Foundation that researches entrepreneurship, found that all small firms would be negative affected by the Durbin price controls.
There has been near-unanimity in opposition to these price controls by Center-Right groups. 33 leaders of conservative and free-market organizations — from the Competitive Enterprise Institute and Americans For Prosperity to the Christian Coalition — signed a letter supporting measures to delay the Durbin Amendment. And Americans for Tax Reform and the 60 Plus Association are both scoring a vote in favor of today’s measure from Tester as one of their key votes.
The question remains, though, if the 15 Republicans who sided with the retailers and voted for the price controls last time will, in Deroy Murdock’s words, will “find their inner Reagans” this time. They could offer a simple explanation to their retailer friends, “We’re only saving a fragile economy and saving you from your own big-government blunders.”