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Appeals court upholds Fed’s debit card fee limits
A U.S. appeals court upheld the Federal Reserve’s controversial rules for debit card “swipe fees” on Friday, disappointing merchants who had argued the charges were too high. Businesses pay the fees to banks when customers use debit cards to purchase goods or services. The fees reimburse banks for costs involved in offering debit cards. At the instruction of Congress, the Fed in 2011 limited the fees to 21 cents per transaction. A U.S. district court in July 2013 agreed with a group of retailers that lawmakers intended the cap to be lower and overturned the Fed’s rule. The three-member panel of the U.S. Court of Appeals for the District of Columbia Circuit sided with the Fed on Friday, saying the law’s “ambiguity” gave regulators leeway to set a higher fee cap. “Because neither agencies nor courts have authority to disregard the demands of even poorly drafted legislation, we must do … Continue reading
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.
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.
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.
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.
Global Economics Group Releases Study of Impact of Durbin Interchange Fee Caps on Consumers
The Global Economics Group issued a press release announcing a new study examining the impact of the Durbin amendment on consumers. The study finds that consumers will lose more than $22 billion as a result of interchange caps. Dr. David Evans, lead author of the study will be discussing his findings at an upcoming conference on the Durbin amendment in Washington D.C. on November 6.
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
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
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.
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