Don’t Save Restaurants by Shafting Consumers

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No one doubts that restaurants are among the hardest—if not the hardest—hit of industries impacted by the unprecedented national “social distancing” response to the COVID-19 pandemic. Through no fault of their own, the nation’s eating establishments, from local diners to big chains, stand to lose an estimated $225 billion.

Like other industries, restaurants are lobbying Congress and state legislatures for assistance. The proposals of the National Restaurant Association, the main industry trade group, are a mixed meal. They have some tasty and healthy policy morsels that will benefit all, but some other items that will give restaurant consumers a bad aftertaste and severe indigestion.

First, the good. The proposals of the association, particularly at the state level, contain some sensible deregulatory initiatives. Among them is allowing restaurants with liquor licenses to deliver alcohol. This week, Texas, New York, and New Hampshire took up that recommendation. These initiatives fit into the category of pandemic responses of #NeverNeeded, a hashtag my Competitive Enterprise Institute colleagues created for deregulatory actions that get rid of longstanding bad rules that hinder the fight against COVID-19.

But in a letter to Congress and the White House, the association asks the government to sic back-breaking regulation on the banks and credit unions that serve the restaurants’ customers. In addition to requesting many types of tax relief, loans, and grants benefiting its restaurant members, the association also requests that lawmakers mandate “reduced credit card interchange fees” from banks and credit unions that process credit card transactions, “expanding upon the Durbin Amendment under the Dodd-Frank legislation.”

As my CEI colleagues and I have written many times before, the Durbin Amendment is one of most costly provisions of the infamous 2010 Dodd-Frank financial “reform” law, and one of the most regressive, benefiting the nation’s largest retailers at the expense of the most vulnerable financial consumers.

The measure slapped price controls on the fees that banks and credit unions charge retailers to process debit card purchases. Under the Durbin Amendment, debit card issuers must charge prices the Federal Reserve defines as “reasonable and proportional to the cost.”

On top of that, costs that these fees can cover are only “incremental costs,” a definition that leaves out most fixed costs like computer hardware and software used to process the card transactions. Not only are banks and credit unions forbidden to make a profit on the debit card fees they charge to retailers, they can’t even cover all their costs.

If the Durbin Amendment explicitly bars banks and credit unions from recouping the full cost of a debit card transaction from retailers, who pays these costs? Consumers. The costs have been shifted to them in the form of reduced benefits, like free checking, and higher fees at their banks and credit unions.

In 2009, the year before Dodd-Frank was enacted, 76 percent of checking accounts were free of charge. By 2011, that share had fallen to 45 percent, and by 2012 to 39 percent, according to Service charges on non-interest-bearing checking accounts have also increased dramatically. A 2014 George Mason University study calculates that the Durbin Amendment contributed to 1 million Americans losing access to the banking system—becoming “unbanked”—by 2011.

The savings on retail goods and services that retailers said would be passed on to consumers turned out to be miniscule or nonexistent. Even accounting for some lower prices in highly competitive markets, the public still suffered a net welfare loss of $22 to $25 billion—the amount lost (in free checking and imposition of new bank fees) that exceeded any gains from lower retail prices—according to a 2015 study published in the Oxford Review of Law and Economics.

Even former House Financial Services Committee Chairman Barney Frank, the liberal Massachusetts Democrat who authored much of the Dodd-Frank law that bears his name, has called the Durbin Amendment harmful to consumers.

So why have legislative efforts to repeal the Durbin Amendment or even lessen it been unsuccessful? It may have something to do with strong lobbying from multibillion-dollar corporations lobbying hard to keep the gains from these price controls. Big retailers like Walmart and Home Depot have reaped a windfall from not having to pay the full cost of processing debit card purchases.

The Electronic Payments Coalition, a group representing payment card networks, banks, and credit unions of all sizes, calculates from Federal Reserve data that retailers have taken in $42 billion from the Durbin Amendment. A Home Depot executive bragged on a stock analysts’ conference call that price controls could add up to $35 million per year to the chain’s bottom line.

Smaller retailers, including local restaurants. are also losing out from the Durbin Amendment. They often make purchases with debit cards and checking accounts, in addition to accepting them as forms of payments, so they have been losing their free checking, just as consumers have, along with business debit card rewards.

The problem will worsen greatly if lawmakers grant the restaurant association’s wish and apply the price controls to credit card interchange fees, as consumers and small businesses may see their credit card rewards shrink or even disappear. When Australia implemented interchange fee caps in 2003, rewards on cards purchases by consumers plunged by 96 percent.

There are some complicated issues involved in responding to the economic harm to industries from measures to combat the pandemic, just as there are in efforts to conquer COVID-19 itself. But one cardinal rule of any relief package should be that no business should get “rescued” through regulations that throw other business and consumers under the bus.