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Retailers have themselves to thank for lower Christmas sales
According to a study recently released by the Coase-Sandor Institute for Law and Economics, the Durbin Amendment has had a net cost to consumers of between $22 and $25 billion dollars. That’s the value of over ten million Kindle Paper Whites on Amazon.com, two million Play Station 4s, and six million LeapFrog Leap Pads (in case you were wondering). It’s also the total of what consumers will not be able to spend on loved ones and holiday expenses, thanks to increases in payment card costs.
Stopping the Spread of Bad Ideas
The problem arises when politicians intervene to regulate the interchange rates that retail merchants pay. Regulating payment card fees has political appeal to elected officials who are told by retailers who claim to be speaking on behalf of consumers. These merchants tell the political class that if they pay lower, regulated interchange rates, they will pass those savings on to consumers. In country after country, the reality is quite different. Sure enough, retail merchants benefit from the lower fees. But those benefits are passed on to the retail merchants’ shareholders, not to consumers as promised. Consumers end up paying higher fees — either through “checkout fees” (surcharges at the register) or higher banking fees.
Electronic Payment Is Valuable
Credit cards, debit cards and now newer technologies like PayPal have revolutionized a critical gear in our economy: payment. The ability to securely and effortlessly engage in consumer transactions — whether an online purchase or filling the gas tank — facilitates commerce. For buyers, conveniences like better record-keeping of purchases, fraud protection and faster transactions are all real and tangible benefits. For sellers, there are advantages to these payment technologies, not least of which is higher sales volumes. Service providers for electronic payment transactions design, build and own costly networks and valuable intellectual property. They incur costs for the services they provide and they deserve to charge a market-based rate to their customers. The notion that statutory or regulatory set price ceilings for these services would yield a net benefit to the economy presumes that the private market has failed and that a government-imposed price is closer to what the … Continue reading
Swipe Fee Caps Don’t Benefit Consumers
Proposals to cap interchange, or swipe, fees rest on bad economics, ignorance about payment systems and rent-seeking by large retailers. Interchange fee caps are a money grab for big merchants (which is why merchants lobby for them), but are an unambiguously bad idea for consumers, small businesses and the overall retail economy. According to the European Commission, the interchange fee is part of an “inefficient” system that “unduly” raises costs. In reality, however, there’s nothing inefficient about these fees. They’re simply prices charged for an immensely valuable product: electronic payments processing. Charging some (but not all) of this price to merchants instead of consumers avoids deterring card usage and preserves the benefits of electronic payments for everyone. Electronic payment systems offer much more than just an efficient payment mechanism. They also provide merchants with fraud protection and valuable logistical tools, reduce labor costs and alleviate the cost of offering in-house credit. … Continue reading
First, Do No (More) Harm
To fulfill its promise to promote consumer protection and fair competition, the Consumer Financial Protection Bureau must avoid two crucial errors. First, the bureau should follow the Hippocratic oath and do no (more) harm. Since the financial crisis, Washington has unleashed a surge of misguided regulation unprecedented in recent economic history. The Credit Card Act of 2009 interfered with the ability of credit card issuers to price risk accurately, thereby depriving many low-income consumers of credit cards. Then the Durbin Amendment to Dodd-Frank imposed price controls on debit card interchange fees, leading to a dramatic increase in bank fees and a loss of free checking for millions of consumers. In addition, bank regulators imposed new limits on access to overdraft protection by consumers. According to the F.D.I.C., one million consumers — mainly low income — lost bank accounts between 2009 and 2011.
Europe and the Price of Plastic
Memo to Brussels: There’s still no such thing as a free lunch, even if you use a credit card. Credit cards exist because they benefit everyone involved. Consumers like the convenience and the cash-flow flexibility. Merchants accept them because they bring in business and allow them to handle less cash. And the banks issue cards and process payments because they make money doing it. It’s that last point that has the European Commission worked up. In a draft proposal to be published next week, the Commission is moving to cap the fees that card companies charge merchants—so-called interchange fees. Merchants don’t like paying these fees, which is no surprise. What is surprising, or at least disappointing, is that the Commission is so willing to do their dirty work at the expense of the other parties involved, supposedly because lower fees can only help consumers.
SAYEGH: Three years of Dodd-Frank’s broken promises
The Durbin Amendment to Dodd-Frank, which was introduced on the Senate floor at the behest of large retailers, with no hearings and little debate. It ordered the Federal Reserve Bank to fix the rates banks and debit-card companies could charge for electronic transactions. We now know the Durbin Amendment has not only failed to save consumers money, as Sen. Richard J. Durbin promised, but is harming consumers. How? Banks that depended on the per-charge fees (known as interchange fees) were forced to eliminate other customer services such as free checking and begin charging customers holding smaller account balances. The number of large banks that offer free checking has declined from 96 percent in 2009 to 35 percent in 2011. Politico reports that “the savings which were to be passed to consumers from the retailers post-Durbin Amendment continue to be mostly theoretical.” Even the bill’s lead sponsor, the liberal Democrat Mr. Frank from Massachusetts, has admitted the Durbin Amendment has failed consumers … Continue reading
When Even Barney Frank Sings The Praises Of Free Markets, We Must Listen
As a result of the Durbin Amendment, which cost banks over $8 billion in the first year alone, consumers have witnessed the disappearance of free-checking accounts, and suffered an onslaught of additional bank fees. Local credit unions and small community banks (supposedly “exempt” from the amendment) have continued to see an alarming rate of foreclosures, and local economies have continued to suffer. Additionally, consumers have yet to see savings at the check-out line – the original intent of the amendment in the first place. Rife with unintended consequences, the Durbin Amendment is a perfect example of public policy gone wrong.
The Durbin Amendment Turns Three
The amendment prevented banks from charging more than 24 cents per debit card transaction. Before Durbin, banks were charging roughly 44 cents per debit card transaction. In the aftermath of the market crash, congressional leaders thought that this price cap would help struggling consumers. Consequently, champions of the Durbin Amendment declared a victory for the American people. However, AFP opposed the Durbin Amendment. The victory for consumers was falsely proclaimed. Durbin’s amendment was actually a boon to retail companies who wanted the government to force debit card transaction costs downward. This did not change the real price of debit card transactions—that remained at 44 cents. Instead, it artificially lowered the price, leaving banks with a loss of 20 cents per transaction.
Keep Congress, courts away from credit cards
By leaving interchange fees to be negotiated in the marketplace, the settlement maximizes competition among credit-card processors, banks and retailers. Consumers reap the benefits of that competition in the form of lower prices and better services.
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