Lower prices! That was the promise of the Debit Interchange Fee Amendment, which gave the Federal Reserve the power to police the interchange fees in debit-card transactions and to regulate rate levels in a way that would make them “reasonable and proportional to the processing costs incurred.” But, with the Federal Reserve set to discuss the level of those rates in a meeting today, the amendment’s impact isn’t looking so rosy anymore.
Sen. Dick Durbin (D., Ill.), who sponsored the amendment, thought debit-card interchange fees were too high, citing a study by the National Retail Federation estimating that each American family had “paid” — because prices were higher due to interchange fees — $427 extra in 2008. (Interchange fees are the percentage of the purchase, usually ranging from 1 to 3 percent, that a merchant pays when a consumer pays with a credit or debit card.) If interchange fees were set to a more reasonable level, surely retailers would lower prices and consumers would win.
Predictably, retailers enthusiastically embraced the amendment and indicated that they would pass on savings to customers. Touting the importance of the measure, Scott Mason, vice president of government affairs for Lowe’s, told the Wall Street Journal that “every dollar we pay the credit-card companies is a dollar we can’t pass on to consumers or use to hire employees or build more stores,” adding that he was talking about “hundreds of millions of dollars.” Home Depot claimed that the benefits of the amendment would “likely . . . include lower prices.”
With so many Americans penny-pinching to scrape through this economic downturn, the argument was appealing. Unsurprisingly, the amendment, which was added to the financial-reform bill, easily passed the Senate in May with bipartisan support, most lawmakers ignoring the protests of the undoubtedly greedy card companies and banks.
There’s just one catch: It now looks like retail prices won’t be going down. What likely will be changing are the bank fees (becoming higher) and the services offered (becoming fewer). “Since passage of the [Durbin] Amendment, analyst reporters for retailers likely to be affected by the provision make no mention of any benefit for consumers,” wrote a bipartisan group of 13 senators in a letter to Federal Reserve chairman Ben Bernanke sent last Friday. “Related to this, many predict that consumers will be faced with additional bank fees as the rule is implemented.”
The senators also urged the Fed to carefully consider “all costs to the issuers and economic value to the merchants” before implementing standards for the interchange-fee rates.
“We are concerned with the consequences of replacing a market-based system for debit card acceptance with a government-controlled system,” stated the senators. “In the long term, price fixing creates more problems than it solves and is antithetical to our capitalist system and the notion of free enterprise. More importantly, price fixing harms consumers.”
What went wrong?
First, there was the Durbin amendment’s naïve belief that while the banking industry could not be trusted to put consumers first, merchants would behave better. There is no mechanism in the amendment that even attempts to force retailers to pass any savings from the lower fees on to consumers. In addition, the amendment affects only debit cards: Credit-card interchange fees remain entirely unregulated, meaning that merchants will experience no difference in the costs associated with over half of purchases involving interchange fees.
But proponents of the legislation also ignored Australia’s experience, which shows the dire result government intervention has for consumers. After Australian interchange fees became subject to government price controls in 2003, annual fees on credit cards shot up 22 percent, while fees on credit cards that gave consumers rewards skyrocketed by up to 77 percent.
Considering how much the banking industry stands to lose, American consumers may well face similar increases. In July, Bank of America estimated that the Durbin Amendment would cause its debit-card profits to decrease by 60 to 80 percent, a loss of $1.8 to $2.3 billion. CardHub.com, a credit-card-comparison website, calculated how much the banking industry would lose based on different rate reductions, and announced that the industry stood to lose as much as $9.1 billion.
Another difference may be what kind of financial products banks aggressively market to consumers. In Australia, the banks sought customers likely to run up debt, hoping to reap additional profits by charging these debt-ridden customers high interest rates. Of course, U.S. banks are unlikely to aggressively seek customers who will build up debt in these current tough credit times, but they may try to push credit cards or prepaid credit cards, which can still produce the old level of profits. Prepaid credit cards, which usually have a host of fees, aren’t generally considered consumer-friendly, while credit cards can prove a temptation to those prone to overspending. This isn’t to suggest that either product be banned or regulated more; it’s only to point out that this might be another unwanted and unintended consequence of the legislation.
Durbin and other lawmakers intended to punish greedy banks. Instead, what they accomplished was giving a financial boost to the retailers (are they any more morally upright than the bankers?) and almost certainly penalizing the consumer with higher fees. It’s a lesson worth remembering for the next time a proposed piece of legislation justifies price-fixing by touting future consumer benefits: While the price-fixing will be real, the benefits may turn out to be a mirage.
— Katrina Trinko writes for National Review Online’s Battle ’10 blog.