swipe fees

Right on Cue

by Ryan Young on September 29, 2011

in Economy, Politics as Usual, Regulation

In this morning’s CEI Podcast, my colleague John Berlau predicted that the new price cap on debit card swipe fees would lead to the end of free debit cards and free checking. He pointed out that while this is an unintended consequence, it is also entirely foreseeable.

It didn’t take long for that prediction to come true. Bank of America just announced that it will start charging its debit card users $5 per month. They are not the only ones:

JPMorgan Chase and Wells Fargo are testing $3 fees for debit cards in select areas, and Citibank recently announced it is raising its fees for checking accounts. Janney Montgomery Scott analyst Thomas McCrohan said last week that Visa and MasterCard, the top two debit card companies, may increase drastically increase (sic) fees on small purchases to offset the losses.

Thanks, Congress.

CEI Podcast for September 29, 2011: The End of Free Debit Cards

by Ryan Young on September 29, 2011

in Economy, Podcast, Regulation

Post image for CEI Podcast for September 29, 2011: The End of Free Debit Cards

Have a listen here.

Every time you use your debit card, the merchant has to pay a fee to the company that issued your card, usually about 1 percent of the purchase price. On October 1, that price will be capped by law to 21 cents. John Berlau, Director of CEI’s Center for Investors and Entrepreneurs, explains the unintended consequences that will hurt consumers, merchants, and banks alike. John has written on interchange fees for The Wall Street Journal, Investor’s Business Daily, The American Spectator, and other outlets.

My Response to Simon Johnson’s Defense of Price Controls Benefiting Big Retailers

by John Berlau on April 7, 2011

in Deregulate to Stimulate, Economy, Regulation

Two weeks ago, I wrote a post blasting 17 Republican senators who voted last year for Dodd-Frank’s Durbin Amendment, which puts below-cost price controls on what credit unions and banks can charge retailers for processing debit card transactions.

Now it’s time for equal time. Here is my response to Thursday’s New York Times column by Simon Johnson, a leading progressive economist, who I argue is not very progressive in defending big retailers’ statist and anti-consumer perogatives.

The good news is that prominent voices on the left and right are getting wise to this retailer ripoff. These include Dodd-Frank author Barney Frank (D-Mass.), who has now called for this specific section to be repealed, and Rep. Debbie Wasserman Schultz, the incoming Democratic National Committee Chair. And on the center-right, leaders of 33 groups — from the Competitive Enterprise Institute and Americans for Tax Reform to the Christian Coalition of America — have signed a letter supporting bipartisan bills to delay the Durbin Amendment. Smart figures on both sides are appalled by the government intervening with price controls that put more money in the pockets of big retailers like Wal-Mart and Home Depot at the cost of free checking and reward points for consumers.

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Interchange — Will 16 Republicans Again Back Durbin’s Price Controls? (Corrected)

by John Berlau on March 16, 2011

in Deregulate to Stimulate, Economy, Personal Liberty, Regulation

Correction: In the original post, I erroneously included Sen. Mike Crapo twice, when I meant to include Sen. Mike Enzi (R-Wyo.) as one of the pro-price control Republicans.

In his post, “Durbin and Federal Reserve Plot to Fix Prices and Harm Consumers,” RedState.com editor Erick Erickson blasts the price controls on debit card retailer interchange fees in Dodd-Frank’s Durbin Amendment. In addition to noting the harms to consumers as costs of debit card processing are shifted to them from retailers — harms such as loss of free checking and imposition of new fees that have set off bipartisan alarms — Erickson lays out the principled conservative case against these price controls and all price controls.

If nothing is done, the Federal Reserve’s price controls stemming from the Durbin Amendment go into effect in July, and banks and credit unions will to lose up to 90 percent of the revenues they make from the interchange fees they charge retailers. These losses will almost certainly be shifted to consumers as both small and large financial institutions have said they will have to raise fees, in some cases to stay solvent. Although smaller banks and credit unions are technically exempt from some portions of the bill, both the Independent Community Bankers of America and the Credit Union National Association have said the exemptions are basically meaningless.

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Interchange Price Controls: Gift to Big Merchants, Lump of Coal for Consumers and Community Financial Institutions

by John Berlau on December 15, 2010 · 3 comments

in Deregulate to Stimulate, Economy, Property Rights, Regulation, Tech & Telecom

On Thursday, the Federal Reserve — at the direction of Congress in the Durbin Amendment to the Dodd-Frank financial “reform” bill — will give a giant gift to some of the nation’s biggest retailers. This present is in the form of of direct and indirect price controls on the interchange fees they pay to financial institutions to process debit cards payments

Yet unless Congress acts to delay or repeal the Durbin Amendment, consumers, community banks, and credit unions will be getting a large lump of coal in their stockings by next December as the expenses of running an efficient payment card system are shifted almost entirely onto their shoulders. Consumers have already seen the costs of this rule through the loss of free checking as a result of banks’ anticipation of an estimated 60 to 80 percent loss of revenue from merchant fees. Moreover, the price controls and other provisions of the Durbin Amendment will like reduce investment and innovation to counter emerging hacking and security threats to the payment system.

The Durbin Amendment regulates the debit card issuers as public utilities — something they are not, as the amendment itself makes reference to a “the number of payment card networks” — but it sets price controls more severe than even rate regulation for local phone companies and utilities by not even explicitly allowing for profit.

Thus, as argued by a lawsuit challenging the Amendment from Minneapolis’ TCF National Bank, the fee controls likely violate both the Due Process and Takings Clauses of the 5th Amendment because they deprive banks and credit unions that issue cards of their property rights to a return on capital invested. The Supreme Cou,rt in its 1989 case Duquense Light Co v. Barasch, affirmed that  a government-set “rate is too low if it is so unjust as to destroy the value of the property for all the purposes for which it was acquired.”

The Durbin Amendment likely crosses this constitutional line by requiring the Federal Reserve to set interchange fees at a rate “proportional to the cost.” And the measure expressly discourages some costs from being considered by the Fed. Expenses such as paying employees to service the complex payment system and long-term fixed costs in setting up the sophisticated infrastructure may be excluded.

In fact, amazingly, the Merchants Payments Coalition, which represent Wal-Mart, Walgreens (who Sen. Durbin admitted — on the Senate floor — lobbied him for price controls), and some of the nation’s biggest stores, says that the cost for retailers should be “at par” or zero. Even Ebeneezer Scrooge or the Grinch couldn’t come up with a more self-serving call for corporate welfare.

And consumers have already started paying for the merchants’ “free lunch.” At banks of all sizes, free checking accounts are disappearing, particularly for lower-income consumer who don’t have linked accounts or can’t maintain higher minimum balance thresholds.

And given the experience of other countries with interchange price controls, consumers will likely lose even more without reaping any significant savings from retailers. The Government Accountability Office of the U.S. Congress found last year that after Australia enacted fee controls on credit cards, Aussie consumers faced “reduced rewards and raised annual fees,” and that there was no “conclusive evidence” that any of the retailers’ $1.1 billion in savings had been passed on to consumers.

The Durbin Amendment will also hurt community banks and credit unions. Durbin and his supporters make much of the fact that the bill officially exempts financial institutions with less than $10 billion in assets from the price controls. But both the Credit Union National Association and the Independent Community Bankers of America remain in opposition to the bill, recognizing that government controls of the market rates of credit and debit card networks will adversely affect all financial institutions that issue these cards. And smaller financial institutions are not exempt for the the other, indirect price controls in the bill, such as the routing rules that also compromise consumer privacy and data security.

Obviously, the Fed should interpret the mandates as flexibly as it can and not be bound by the vague language of some of the measures. But Congress can’t absolve itself of responsibility for this burdensome and regressive measure. This includes normally conservative Republicans, such as the duo from the state of Georgia, who speak out correctly against price controls in health care but voted for the controls in the Durbin Amendment after lobbying from Atlanta-based Home Depot

It should enact a bipartisan repeal — or at the very least delay — the Durbin Amendment at its first opportunity. It should gift-wrap this legislation by titling the bill, as I have suggested before in The Wall Street Journal, the “Free Checking Restoration Act.”

Photo credit: tidewater eyesores’ flickr photostream.

Durbin’s Walgreens Corporate Welfare Amendment

by John Berlau on May 13, 2010

in Bailout Watch, Politics as Usual, Zeitgeist

 

Give Dick Durbin some credit for his chutzpah. It’s not every lawmaker who, in proposing an amendment to a financial reform bill ostensibly aimed at targeting “fat cats,” would admit that the inspiration for his measure was a Fortune 500 CEO.

But that’s just what the Senate Majority Whip who represents Illinois did when introducing his amendment to the financial regulation bill to control how much credit and debit card issuers charge merchants to process their cards. In a Monday speech on the Senate floor, Durbin related how he was moved after the CEO of Deerfield-Ill.-based Walgreen Co., the nation’s largest drugstore chain, contacted him to bellyache about these costs.

“I had the CEO of Walgreens contact me last week,” Durbin related on the floor, “and he told me that when they look at the expenses of Walgreens, …it turns out the fees that Walgreens pays to credit card companies is the fourth largest item of cost for their business.”

Durbin then tried to argue that these processing fees — called the interchange fee — hit small firms as well. But some of the strongest advocates calling for direct and indirect price controls on these merchant fees are some of the nations biggest retailers such as 7-Eleven Inc., Home Depot Inc., and Overstock.com Inc.

And contrary to their spin, it’s not just “big banks” and credit card companies who would be hurt by interchange fee price controls such as in Durbin‘s amendment — which may come to a vote as early as today — but community banks, credit cards, and consumers who would see the costs of processing a card shift to their pockets.

Interchange fees, often dismissively called “swipe fees” by merchants groups, average about 1.75 percent of a payment card transaction. But they benefit merchants in a myriad of ways from increasing business to decreasing the costs and risks of handling cash and checks, virtually eliminating a range of problems in accepting payments from employee theft to check fraud.

Durbin, whose amendment requires the Federal Reserve Board to set “reasonable and proportional” interchange fees for debit cards, parrots merchants’ spin that the costs of processing a payment card are little different from that of cashing a check. Durbin argued on the floor that if a customer pays with a check, there are “no fees involved,” but “if you use a debit card, a debit card which would take the money directly out of my checking account, the same as my check, the interchange fee is applied.”

But the costs of a debit card are not “the same” as a check, and this is why many retailers now refuse to take checks. With checking, the retailer is on the hook for nonpayment from a bounced or fraudulent check. With debit and credit cards, the issuer takes on 100 percent of the risk of nonpayment.

Moreover, as noted in a study by the Government Accountability Office, processing and receiving checks from a customer’s personal funds can take five days, but retailers typically retrieve card payment within one to two days. These are some of the reasons why most retailers themselves have decided the costs of accepting credit and debit cards, when compared to cash and checks, are worth paying.

But with the Durbin amendment and other measures, retailers are trying to push this cost off for someone else to pay. And, in looking at the effects of interchange price controls in other nations, this someone else will almost certainly be consumers.

In reviewing Australia’s caps on interchange fees, for instance, the GAO noted in its November 2009 study that in response to these controls, card issuers “reduced rewards and raised annual fees” for Aussie card holders. Worse, it appears that none of the $1 billion in savings that merchants received as a result of lower fees were passed on to consumers in the form of lower prices., the GAO noted.

The GAO also found that interchange fee controls would make it harder for smaller banks and credit unions to compete, because making payment cards less profitable per transaction would give the advantage to large banks that can process transactions in greater volume. “With less interchange fee income, representatives of smaller issuers such as community banks and credit unions told us they likely would not offer rewards cards,” the GAO reported.

Durbin attempts to respond to these concerns by exempting banks and credit unions with less than $10 billion in assets from the debit card fee controls. But a letter co-signed Wednesday by the Independent Community Bankers of America and the Credit Union National Association makes clear that there is no way to shield smaller institutions from the effects of these controls. “By directing the Federal Reserve to regulate only the debit interchange of big banks,“ the letter states, “the amendment makes our institutions’ debit cards the most expensive for a merchant to accept — something the merchant will not tolerate for long.”

If Congress really wanted to lower costs for the nations retailers, as well as consumers, it could scrutinize the cost of its own red tape from the laws it imposes as well as the new costs for retailers from the Senate financial bill itself. Many big and small merchants have legitimate concerns, for instance, that the new Bureau of Consumer Financial Protection will subject them to costly bank-like regulations if they extend credit as a minor part of their business, such as in providing layaway plans.

But Durbin has opposed efforts to exempt retailers such as auto dealer from the new agency’s control. In a conference call with reporters, Durbin asked “why would be ever exempt them from this type of consumer financial protection” when consumers need to be protected from “trick and the traps” of all businesses.

Yet he doesn’t seem to mind the “tricks and the traps” of his own amendment that would shift costs to consumers and provide corporate welfare to his beloved constituent Walgreens and other retail giants.

 

 

For more info on this issue, see the study I co-authored Payment Cards Networks Under Assault: How Capping Interchange Fees Will Hurt Consumers, Charities Community Banks, and Credit Unions.”?

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LibertyWeek 63: Suing the Government into Honesty

by Richard Morrison on October 5, 2009

in CEI Projects, Features, Podcast, Zeitgeist

Your host Richard Morrison welcomes guest co-host Jeremy Lott and Editorial Director Ivan Osorio for Episode 63 of the LibertyWeek podcast. We start with CEI’s FOIA fight with the U.S. Treasury, 7-Eleven’s attempt to give consumers a big gulp of government and the solution to a jobless recovery. We then move on to union pension politics, Ireland’s regrettable embrace of EU hegemony and some scantily-clad Olympic News.

7-Eleven serves up Big Gulp of Big Government to credit card consumers

by John Berlau on September 29, 2009 · 2 comments

in Bailout Watch, Culture, Economy, Politics as Usual, Sanctimony, Trade, Zeitgeist

Tomorrow, 7-Eleven Inc. and other big retail chains will hit Capitol Hill to offer Congress members and their staffs a supersize serving of hypocrisy. Retailers, who rightly complain about costly government mandates in health care and other areas, are now calling for Congress slap price controls on the interchange fees they pay to banks and credit unions for services associated with the credit and debit cards of retail consumers.

7-Eleven has fine stores that offer many conveniences to their customers, but in this case, they are trying to force down the throats of American consumers a “big gulp” of big government. If Congress acts on 7-Eleven’s misleading petition to put price controls on interchange fees, consumers will pay the price through the reduction of reward programs such as frequent flier miles, and the possible return of annual fees. Credit unions and community banks will pay the price too in higher costs that will make it more difficult to offer cards to their customers, forcing savers to go to big banks if they want the convenience of credit and debit cards.

Contrary to the spin of the 7-Eleven and other big retailers, interchange fees, also called “swipe fees,” are only levied on merchants, and none of major legislation before the U.S. Congress would require that retailers pass on one penny of their resulting savings on interchange fees to consumers. And Australia’s recent experience with interchange price controls resulted in no tangible benefits and plenty of added costs for consumers down under.

John Simon, a top regulator at the Reserve Bank of Australia, recently told a conference of the Federal Reserve Bank of Chicago, that there was no evidence of retailer savings being passed on to Australian consumers, according to the Credit Union Times. Yet the Australian credit card holders faced plenty of costs to “make up for” the retailer costs in terms of higher fees and fewer rewards such as frequent flier miles, according to a study by the U.S. Government Accountability Office.

Community banks and credit unions, which have lower profit margins on their credit and debit card offerings, would also lose out. In Australia, the Credit Union Times reports, “a cap on card interchange similar to one promoted by some U.S. retailers has turned Australian CU card programs from being contributors to their bottom lines to net money losers.” Similarly, Mike Clayton, head of Champion Credit Union in the small town Canton, North Carolina, says price controls on interchange fees could “put us into a deficit on that card program.”

There are a variety of options for retailers in credit card payment services, such as new online methods of payment, to ensure competitive pricing. CEI also supports expanding the ability of retailers to form their own affiliated banks, or industrial lending companies, to do their own card processing if they so choose.

But lawmakers should also realize that credit and debit card processing is not free, and retailers would not be accepting cards if they did not lead to more purchases in stores and reduce the costs of alternatives such as carrying cash. Before credit cards were so prevalent, expensive armored cars hauling cash from retail stores were a common fixture.

In short, there is no such thing a free lunch, and lawmakers should not enable 7-Eleven and other retailers to soak consumers with more lunch fees.