Competitive Enterprise Institute | 1899 L ST NW Floor 12, Washington, DC 20036 | Phone: 202-331-1010 | Fax: 202-331-0640
On a snowy Thursday in the nation’s capital – with little more than a week to go until Christmas – the Board of Governors of the Federal Reserve Bank decided once again to play Santa to a select group of businesses that included the world’s wealthiest corporations. And once again, average Americans are going to be footing the bill for this fat cats’ holiday feast served up by the Fed.
The gift the Fed voted to give on Dec. 16 wasn’t free money through more quantitative easing – or whatever new name they have come up with to make inflation sound nice – although that’s probably coming up soon. Rather, under the direction of an amendment to the Dodd-Frank financial “reform” law by Senate Majority Whip Dick Durbin (D-Ill.), the Fed bestowed near-free access to the services of the vast electronic debit card payment system for some of the nation’s wealthiest retailers – with the tab to be paid for by community banks, credit unions and, of course – you the American consumer.
If the Fed’s proposed rule  goes through, come next Christmas Wal-Mart, Walgreens, Home Depot and the other retailers who lobbied for this piece of corporate welfare will have even more overstuffed stockings. These and other retailers benefit greatly from consumers using cards, both in increased sales and in protection from the costs of fraud from bad checks and theft of cash, yet they have gone charging to Washington to for a regulatory “free lunch” to allow them to shift the costs of these valuable services to consumers.
In one of those rare moments of politicians acknowledging the true masters whom they serve, Sen. Durbin admitted  on the Senate floor that the CEO of Walgreens, headquartered outside of Chicago in his home state, called him to complain that the transaction fees Walgreens pays to process debit and credit cards were “the fourth largest item of cost for their business.” Durbin actually argued that relieving costs of doing business for a company that makes $2 billion  in annual profits was a reason for support price controls on what they pay for financial services.
But the Fed even exceeded Durbin’s order, filling the wish lists of Walgreens and other merchants while giving their customers several lumps of coal. Next holiday season, even if they are not paying vastly inflated prices for the goods they buy due to quantitative easing, American consumers will be losing their free checking, seeing the return of annual fees, and getting significantly reduced reward points for the purchases they make with plastic.
Under the proposed rule the Fed put forward for regulation of interchange fees – the fees card issuers charge retailers to process debit card transactions – merchants will never pay more than 12 cents for any customer’s transactions, whether it’s for $1.00 or $10,000. This goes far beyond the even the language of pro-retailer Durbin Amendment, which required the Fed to “establish standards” to assess whether interchange fees were “reasonable and proportional to the cost,” but did not specify what these fees should be.
According to the Associated Press , the Fed said that average interchange fees in 2009 ranged from 44 to 56 cents. This means that the 12-cent cap will cause a 70 to 90 percent drop in revenues for the banks and credit unions that issue debit cards. And By the Fed’s own admission, this will not come close covering the cost of processing debit card transactions, let alone allow the banks and credit unions to make a profit from what they charge retailers for the valuable services of electronic payments.
The rule states that card issuers will only be able to recover what the Fed deems to be “allowable costs.” Among the costs that are not “allowable,” according to the Fed, are fixed costs of computers and software, the cost of distributing debit cards, and employee costs for “responding to certain customer service inquiries.” Banks and credit unions can charge merchants a small fee hike for the cost to combat debit card fraud, but only under the strictest of conditions.
According to Professor Richard Epstein, a constitutional law and property rights expert on the faculty of the University of Chicago Law School, this rule is the first price control scheme in U.S. history in which businesses, by design, were required to price below product’s cost. He says in an interview that even under the gasoline price caps of the ‘70s, “no one was asked to sell below cost.”
And this is not only horrible policy; it also likely crosses a constitutional line. As argued by a lawsuit challenging the Durbin Amendment from Minneapolis’ TCF National Bank, on which Epstein is serving as an attorney, the fee controls likely violate both the Due Process and Takings Clauses of the 5th Amendment because they deprive banks and credit unions that issue cards of their property rights to a return on capital invested. The Supreme Court in its 1989 case Duquense Light Co v. Barasch, affirmed that a government-set “rate is too low if it is so unjust as to destroy the value of the property for all the purposes for which it was acquired.”
But according to the Fed, the 12-cent cap creates “an incentive to control costs.” And besides, the Fed points out, “the interchange fee standard would not limit the ability of an issuer to earn revenue from other sources, such as by charging fees to its cardholders.”
And indeed, consumers have already been paying for the anticipated costs of the Durbin Amendment. “Free checking as we know it is ending,” reported the lead paragraph of an Associated Press story  in October, and the article listed one of the main reasons as “the new regulations limit fees the bank can collect when retailers accept debit cards.”
If Australia’s experience in capping interchange fees for credit cards in 2003 is any guide, the vanishing of free checking could be just the beginning. As George Mason University law professor Todd Zywicki noted  in the Wall Street Journal, “Annual fees increased an average of 22% on standard credit cards and annual fees for rewards cards increased by 47%-77%. Card issuers also reduced the generosity of their reward programs by 23%.” And last year, a study by the Government Accountability Office of the U.S. Congress found no “conclusive evidence” that any of the Aussie retailers’ $1.1 billion in savings had been passed on to consumers.
The good news is there are efforts underway in Congress to delay or repeal the Durbin Amendment, and even some Democrat Dodd-Frank supporters have pulled back, correctly perceiving that this measure and the Fed rule implementing it make a mockery of their claim that Dodd-Frank was a victory for consumers over special interests. Even soon-to-be former House Financial Services Committee Chairman Barney Frank (D-Mass.), criticized  the Fed on CNBC for setting the fees “too low.”
But the Tea Party movement also has to watch the GOP on this issue, including some in Congress they may normally count as their own. 17 Republicans voted for the Durbin Amendment in the Senate last May, including some ostensible conservatives who would oppose price controls in most other contexts. Georgia Sens. Johnny Isakson and Saxby Chambliss voted aye, for instance, after heavy lobbying from Atlanta-based Home Depot, a firm that American Banker described as “on the warpath” against interchange fees . (The full list of which senators were naughty or nice on their votes on the Durbin Amendment is here .)
Conservatives are often sympathetic to retailers and with good reason. They are hit with the taxes and regulations of Big Government and threatened with threatened with coercive measures from Congress such as union “card check.” Yet when the leaders of their industry lobby for price controls, we must say in unison, “No sale!” This is what several groups in the Center-Right Coalition – from CEI and American for Tax Reform to Phyllis Schlafly’s Eagle Forum – have already done in a letter  last summer.
The Fed is taking comments on the rule  through Feb. 22, and you can send them your thoughts at email@example.com . Or go here  and follow the instructions for submitting comments. If you wish to share your views on whether Congress should repeal the Durbin Amendment’s price controls, or delay the date the Fed implement them, you can e-mail your members of Congress or call them through the general number of (202) 224-3121.
Meanwhile, it wouldn’t hurt to have some Tea Parties in front of your neighborhood Walgreens and Home Depot communicating that if they want you to shop in their stores, they’ll have to stop lobbying to take away your free checking and card rewards!