Competitive Enterprise Institute | 1899 L ST NW Floor 12, Washington, DC 20036 | Phone: 202-331-1010 | Fax: 202-331-0640
Senate Majority Whip Dick Durbin never tires of making a show of going after "fat cats," but a recent measure of his could better be described as that of feeding kittens to lions.
Last month the senior senator from Illinois rammed through an amendment to the financial regulation bill to put price controls on the amount that credit and debit issuers charge merchants to process purchases with their cards.
Then, after community banks and credit unions said the price controls would devastate their card business, Durbin again tried to make big credit card networks the whipping boy.
In a letter to Visa and MasterCard executives, Durbin accused them of trying "to frighten small banks and credit unions" and harangued them for making "enormous revenue ... at the expense of America's small businesses and consumers."
But a revealing speech Durbin made on the Senate floor shows that it isn't small businesses and consumers who would most benefit from Durbin's measure. The big winners would be some of the nation's biggest retailers, including one particular merchant that just happens to be in Durbin's home state, who would be allowed to shift their costs of processing credit and debit cards to consumers.
In his May 10 address, Durbin said he was moved to act after the CEO of Deerfield-Ill.-based Walgreen Co., the nation's largest drugstore chain, contacted him to bellyache about these costs.
"I had the CEO of Walgreens contact me last week," Durbin dramatically exclaimed, "and he told me that when they look at the expenses of Walgreens, ... it turns out the fees that Walgreens pays to credit card companies is the fourth-largest item of cost for their business."
In addition to Walgreens, some of the strongest advocates calling for direct and indirect price controls on these merchant fees — called the interchange fee — are some of the nation's biggest retailers. They include 7-Eleven, Home Depot and even British Petroleum, which in addition to the offshore drilling it is now infamous for also has a large presence in retailing through its gasoline stations.
The merchants are complaining that their interchange fees, which they dismissively call "swipe fees," average about 1.75% of a payment card transaction.
Durbin, whose amendment requires the Federal Reserve to set "reasonable and proportionate" interchange fees for debit cards — and allows merchants to break the provisions of contracts with banks that forbid merchants from setting a minimum and maximum amount that consumers can pay with credit cards — parrots the merchants' spin that the costs of processing a payment card are little different from that of cashing a check.
But Durbin and his friends at Walgreens and BP conveniently overlook the fact that taking cards benefit merchants in a myriad of ways — from increasing sales to decreasing the risks of fraud and theft that come with the handling of cash and checks.
As a recent study by the center-left New America Foundation concludes:
"When the benefits of bank cards to merchants are accounted for . .. accepting card payments more than pays for itself."
But some retailers don't see why they should pay anything when they can simply lobby for government regulation that would push this cost off for someone else to pay. And, in rare moments of honesty, retailers admit this someone else will likely be the American consumer.
In testifying on a related measure in the California legislature, BP maintained that its gas stations shouldn't "be prevented from passing some of the cost of the interchange fee to consumers."
To see how the U.S. consumer will likely be ripped off by Durbin's measure, we can look at the effect of interchange price controls in Australia. That's what Congress' Government Accountability Office did last November, and it found that card issuers "reduced rewards and raised annual fees" for Aussie card holders.
Worse, it appears that none of the $1 billion in savings that merchants received as a result of lower fees were passed on to consumers in the form of lower prices, the GAO noted.
Worse still, capping debit card fees that retailers pay could be the end of "no-fee" checking accounts for consumers. New York Times columnist Andrew Ross Sorkin writes that banks "could make up for (lost revenue) by adding fees to checking accounts."
Unfortunately, Durbin is not the only lawmaker who is siding with merchants who want corporate welfare at the expense of consumers. Seventeen Republicans, including normally staunch conservatives such as Sen. David Vitter of Louisiana and Sen. John Barrasso of Wyoming, voted for Durbin's measure, suddenly finding price controls they liked.
The bright side is that 10 members of Durbin's own Senate Democratic caucus voted no, and in the House, members of both parties have labeled interchange fee caps as the big retailer giveaway that it is.
In negotiations of the final House-Senate bill, all members would be wise to listen to the words of Rep. Brad Sherman, D-Calif., at a House hearing in the fall. He asked the simple question:
"Why should I lose my free miles so that Wal-Mart's costs go down?"