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Dodd-Frank Interchange Fee Price Controls Less Draconian, But Still Destructive

Today, at around 3:30 pm, the Federal Reserve will vote on a final rule that will make price controls from the Durbin Amendment of Dodd-Frank less of a train wreck -- but still very destructive -- for community banks, credit unions, and consumers.

The Durbin Amendment puts price controls on the interchange fees -- or “swipe fees” as the something-for-nothing retailer lobby calls them -- that banks and credit unions charge merchants to process debit process debit transactions. Retailers pay a fee averaging 1.19 percent on each card purchase.  In return they get more sales and the guaranteed payment for all purchases that was lacking in the “good old days” of bounced checks.

But despite the benefits ATMs and payment card technology have brought to them, big retailers such as Wal-Mart and Home Depot have taken an entitlement mentality to this technology. They successfully lobbied to get -- with assistance from both Senate Majority Whip Dick Durbin and 17 Senate Republicans -- price controls in the Dodd-Frank "financial reform" bill stating that banks and credit union can only charge fees that are "reasonable and proportional to cost." Never mind that there are no such requirement that retailers charge consumers prices that are "reasonable and proportional" to the cost of goods they sell.

In December, the Fed went beyond what the Durbin Amendment required in setting 7-to-12-cent fee cap for every debit card transaction, whether it be for $50 or $5,000. By the Fed's own admission, these fees would not come close to covering the debit card infrastructure.

Since the Fed rule would not make costs of debit card processing disappear, much of these costs will be transferred to in terms of loss of free checking and debit card rewards, new charges for using an ATM, and other fee hikes and service cuts. In its rule, the Fed almost invited banks and credit unions to do this, "helpfully" pointing out that "the interchange fee standard would not limit the ability of an issuer to earn revenue from other sources, such as charging fees to cardholders."

The draconian price controls from the Fed created a fury among credit unions, community banks and consumers that resulted in a bipartisan 54-vote majority earlier this month to delay the rule. But thanks to the GOP's "Durbin Dozen" who, despite a letter opposing the price controls from 33 Center-Right leaders (including CEI, Americans for Tax Reform, and the Christian Coalition of America), voted to keep the price controls and prevent what would have been the first chink in Dodd-Frank's armor. So the delay measure did not reach the 60 votes needed to clear the Senate.

Still, the concern of 54 senators appeared to be enough to convince the Fed to significantly hike the 12-cent cap, which is not set in stone in the statute, so that banks and credit unions can at least cover most of their costs. CEI and other groups had argued in comments to the Fed that setting price controls this low was "arbitrary and capricious" as well as a likely unconstitutional deprivation of the property right to a return on capital invested.

Ealier this morning, MarketWatch reports that "the central bank may ease up on the limits banks can charge retailers to around 20 cents a transaction." The Fed just announced the cap will be 21 cents, with an addition 5-cent adjustment for fraud costs.

Though this "still would be a significant reduction in fees for banks" and credit unions, as MarketWatch notes, it still may be enough for a "modest rally" in financial stocks. And it hopefully will be enough to avert a warning by Federal Reserve Chairman Ben Bernanke that as written, the proposed rule may cause some community banks to fail.

Still, this will result in government-forced shifting of costs from some of the nation's wealthiest retailers to the backs of consumers. And given the history of price controls, the very retailers lobbying for this will likely also lose out in the long run as the Durbin-Fed rules reduce investment in new mobile payment systems and anti-fraud technology. As the great free-market economist Thomas Sowell writes in his book Basic Economics, price ceilings mean “less is supplied at a lower price than at a higher price -- less both quantitatively and qualitatively.”