Dodd-Frank’s Durbin Amendment Drives Up Costs on Memorial Day and Every Day
Over the Memorial Day weekend, the Big Retail lobby created a dubious driving distraction.
The Merchants Payments Coalition, whose members include retail giants like Walmart and 7-Eleven, took out a Business Wire press release warning motorists to “Get Ready to Be Side-Swiped by Your Bank’s Exorbitant Credit-Card Fees.” In reality, it’s rent-seeking retailers and allied politicians who are rear-ending American consumers on Memorial Day and every day through the price controls they pushed for in Dodd-Frank’s Durbin Amendment. Now, they are lobbying Washington to ram ordinary folks even more with policies that will make security breaches like that of Target more likely to happen.
At issue are “interchange fees,” fees charged to merchants by credit and debit-card issuing banks and credit unions to process consumer transactions. Together with consumer payments, these fees finance the electronic payment infrastructure and technologies to fend of security threats. But ever since the Dodd-Frank financial “reform” was signed by President Obama in 2010, the retailers have begun a massive cost-shift that hits consumers in the wallet.
At the behest of big retailers such as Walmart and Illinois-based Walgreens, Senate Majority Whip Dick Durbin (D-Ill.) inserted into the Dodd-Frank financial “reform” of 2010 a measure that mandates that the debit card interchange fees charged to retailers must be “reasonable and proportional to the cost incurred by the issuer [bank or credit union issuing the card] with respect to the transaction.” Then, again at Big Retail’s behest, the Federal Reserve barred banks and credit unions from profiting on the fees charged to retailers, only a very limited portion of costs could actually be recovered in the fee.
The result has been both a humongous cost-shifting for debit card processing from retailers to consumers — a sharp reduction of free checking for low-balance account and the virtual end of debit card rewards — as well as much less resources from retailers to fight hacking and cyber attacks. George Mason University law professor Todd Zywicki, now a member of the Competitive Enterprise Institute’s board of directors, has found that the Durbin Amendment also bears much of the blame for more than 1 million consumers becoming unbanked over the past few years.
Yet this still isn’t enough for the retail lobby, which is suing to force the Durbin price controls down even further and saying in this lawsuit that banks and credit unions should not even be allowed to charge them for fraud-prevention costs. Fortunately, a panel of the D.C. Circuit Court of Appeals rejected this argument in March.
The merchants are also extending their push for price controls to credit cards with deceptive messaging that poses a pro-consumer. The Memorial Day press release claims that “at, say, 2 percent, swipe fees can add more than seven cents a gallon at the pump.”
This is misleading on several levels. First, any cost incurred by the gas station can be said to add to the price at the pump. The electricity to keep the lights on can be said to add several cents a gallon. Second, the press release makes it seem as if there are no costs to handling cash. As many a frustrated driver can testify, paying cash almost always requires a driver to go into the station to “prepay” to an employee.
These employees taking drivers’ cash do not work for free. And if a gas station took no credit cards, it would likely have to hire more employees to handle the cash purchases. That in itself may come to seven cents or more for a gallon of gas. Credit and debit cards also eliminate the problem of bounced checks and minimize the risk of theft when cash is laying around.
The discounts that some gas stations give for cash purchases do not necessarily represent a cost differential for the station owner. The station could just be trying to get drivers to come inside to lure them into buying candy bars, sodas, or other accessories.
This was illustrated in 2012 when some gas stations in New York state charged $2 to $3 more per gallon to credit and debit card users. In the free market, it is perfectly all right for a gas station to charge differently for cash and credit for whatever reason, as long as this differential is not advertised deceptively (it’s not clear if this condition was met in New York and in other instances in which drivers can only see the cash price from the road). But they should quit whining and stop lobbying for Durbin-like controls on credit cards.
Putting price controls on credit, as well as debit card, interchange fees will almost certainly mean the return of annual fees and a sharp reduction in credit card rewards. In reviewing Australia’s caps on interchange fees, for instance, the Government Accountability Office noted in its November 2009 study that in response to these controls, 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.
Now that would be a real side swipe to consumers!