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Retailers Only Sell Half a Loaf in their Analysis of the Costs of Interchange Fees
Open Market published a blog post which points out the flaws of the Robert Shapiro study on the cost of interchange fees. The author writes that the study “ignores half of the equation – the increased costs to bank card users from banks needing to make up a sudden shortfall in revenue as a result of this regulation.” Additionally, the piece highlights the Evans et al. study which finds that some savings to merchants were passed on to the consumer, but those savings were more than wiped out by the increased banking fees and the loss of reward programs.
We Didn’t Regulate Credit Cards, We Regulated People
I described the effects of the Durbin Amendment to the 2010 Dodd-Frank Act in addition to a general overview of why current levels of regulation hurt the economy. The Amendment gave the Federal Reserve the power to limit interchange fees, which they did at around 24c per transaction for “non-exempt” issuers. When the Durbin Amendment was first mooted, based on the Australian experiences, we predicted that none of the savings to merchants would be passed on to consumers and that it would bring an end to credit card rewards programs and free debit cards. Now, thanks to a study by David Evans et al. of the University of Chicago Coase-Sandor Institute, we know that that did happen, and that consumers are worse off to the tune of around $200 per household.
The Not-So-Friendly Sen. Dick Durbin Amendment
Price controls are never a good idea, yet they seem to be a staple of policymakers across the globe. Inevitably, they result in dislocations in the market that frustrate both consumers and producers. If prices are too low, shortages emerge leaving consumers in the cold and producers disinterested in serving that market. High prices create gluts, as unwanted goods sit on the shelves while producers are enticed to produce even more. So it should be no surprise that Sen. Dick Durbin’s (D-Ill.) attempt to control fees on debit cards has done little to help consumers, while the retailers who lobbied for the law are quietly pocketing billions. One study found that the Durbin Amendment transferred more than $8 billion from banks to retailers.
Judge Leon’s Lawless Durbin Amendment Debit Card Decision
Since Judge Richard Leon issued his shocking decision on July 31 that called for even more draconian price controls under Dodd-Frank’s Durbin Amendment, some legal commentators have given the judge the benefit of the doubt. They concede the Durbin Amendment is bad law, but they say Judge Leon was correct in his interpretation of the amendment, which basically mandates the Federal Reseve not set price caps on what banks and credit unions charge for interchange fees on debit cards at any rate higher than retailers would like to pay them. These commentators, some of whom I respect a great deal, simply overlook the incredible sloppiness in Leon’s ruling in NACS. v. Board of Governors of the Federal Reserve. Leon’s decision is filled with unprofessional snark, misconstrues economic terms in the statute’s language and limits its research of “legislative intent” to the “intent” of one member of Congress who voted for … Continue reading
How Card Regulation is Killing Competition
If you think there isn’t enough competition in the payments industry, just wait a few years – there will be a lot less in the U.S. and European Union. Before I explain why let’s take a survey of the state of competition. No, the payments card industry is not a perfectly competitive industry that would warm the cockles of your micro-econ college professor’s heart. But then, what is? In the U.S. we have Visa, MasterCard, American Express, and Discover, not to mention PayPal, several PIN debit networks, and a lot of startups, all slugging it out. In the EU the state of competition varies by country, but Visa, MasterCard, American Express and often some domestic systems are competing. Visa (either International or its European doppelganger) is the big dog in a lot of places. But Visa has a lot more competition than the leading player does in a lot of … Continue reading
Durbin’s Dust Just Got Deeper: Consumer Costs Will Rise
The legacy of the Durbin amendment continues: A U.S. District Court has now ruled against the Federal Reserve Bank in a lawsuit brought to the court by merchant groups. The ruling claims that the Fed disregarded the intent of the amendment by inappropriately inflating debit card transaction fees above the average cost of the fees. While there is no doubt that this ruling will be appealed and continue to play out in the courts, the consequences of this decision will be significant. If the ruling stands, the implications for the checking debit card and prepaid debit card markets could devastate the economics of these businesses.
Court Wrong to Make Dodd-Frank Durbin Price Controls More Draconian
Today, U.S. District Judge Richard Leon ruled that the Federal Reserve’s implementation of the Durbin Amendment of the Dodd-Frank financial overhaul, which sets price controls on what banks and credit unions can charge retailers to process debit card purchases, was not draconian enough. Though I am no fan of either Dodd-Frank or the Durbin Amendment, this is a severely flawed reading of the law based on a false definition of “legislative intent.” Should the Fed adopt Leon’s interpretation, it will almost certainly result in more bank and credit union fees for consumers. The Fed would also open itself up to even more litigation on the price controls, including constitutional issues involving the property right to seek a return on capital invested guaranteed by Due Process and Takings clauses of the 5th Amendment. In 2011, the Fed set price caps on debit card interchange fees at 21-26 cents per transaction. Although … Continue reading
Federal Courts May Reshape Debit Card Industry in U.S.
In a further illustration of the determination of merchants to wrestle control over cost of payment acceptance away from the global card networks, a Federal Court this week validated their argument that Regulation II rules were counter to the intent of Congress in writing the Durbin Amendment, and in effect, ordered the Federal Reserve to revisit its regulation. Another hearing has been scheduled for Aug. 14th. The Federal Reserve has not responded as of this writing. The court was not ambiguous in citing that the existing debit interchange fee cap was improperly calculated and included costs over and above basic authorization, settlement, and clearing. It also ruled that debit network routing choices were not provided for all authorization types, which Mercator Advisory Group interprets as meaning two networks for PIN transactions and two networks for signature transactions. So far, we have seen nothing mentioned specifically about the fraud adjustment component … Continue reading
How Swipe Fee Court Ruling Will Hurt Banks
The stiffer routing requirements may pose technological hurdles, according to David Stein, a director at the banking consulting firm Promontory Financial Group. He noted that Visa (NYSE: V) and MasterCard (MA) currently run the only signature debit networks, and questions whether those two systems could cope with potentially unpredictable swings in volume. He also said that the entire logic of the routing system would have to be changed to allow for Visa cards to be processed over MasterCard’s network, and vice versa. “I don’t want to say that they are insurmountable technological obstacles,” said Stein, a former lawyer at the Fed. “But they could be very costly and disruptive to implement.”
Banks Stand to Lose Billions as Court Slams Fed Swipe-Fee Rule
Madeline Aufseeser, a senior analyst with Boston-based consultancy Aite Group LLC, estimated that the Fed’s current implementation of the Durbin amendment has cost banks about half the $16 billion they once made from debit-card swipe fees each year. They take in an estimated $40 billion from credit card swipe fees, which are unaffected by the Fed rule, she said. If the Fed responds to the ruling by reverting to its original proposal of 12 cents per transaction, revenue for the top 50 credit-card issuers who use Visa and MasterCard networks and have assets over $10 billion would drop to $4.3 billion per year, Aufseeser calculated. Banks called on the Fed to head off the decision’s impact. “We urge the Federal Reserve to pursue all legal means to mitigate the harm this decision will cause to consumers, community banks and all institutions that provide financial services to local communities,” Frank Keating, … Continue reading
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