Even considering the usually sympathetic audience at the Huffington Post, liberal economist Dean Baker had a tough task of persuasion with his Monday column defending price controls on debit card “swipe” fees that primarily benefit big retailers such as Wal-Mart. In “The Big Retailers Versus the Big Banks: It Makes a Big Difference,” Baker, long a critic of Wal-Mart’s labor practices, argued to HuffPo’s progressive readers that — in his actual words — “In this case, Wal-Mart is on the side of the angels.”
But in making this case, Baker was on the other side of the facts. He completely misstated the findings of the Federal Reserve in writing the rule in question, asserting that the Fed estimated that the price caps would cover costs of banks and credit unions that issue the debit cards, when in fact the Fed said explicitly said it was setting price controls below-cost.
Baker was defending the Durbin Amendment from the Dodd-Frank Wall Street Reform and Consumer Protection Act, which puts price controls on the interchange fees — or “swipe fees” as retailer critics call them — that banks and credit unions charge merchants to process debit process debit transactions. Retailers pay this fee on each card purchase and in return they get more sales and the guaranteed payment for all purchase that was lacking in the “good old days” of bounced checks. But in implementing the Durbin Amendment, the Fed is drastically reducing this fee from an average of 44 cents to no more than 12 cents per transactions. The biggest retailers will get the biggest short-term benefits from these price controls.
Baker’s task was complicated by the fact that even writers for the normally pro-regulatory Huffington Post has published impressive investigative reporting that shows that Wal-Mart and Home Depot will be the biggest beneficiaries of the price controls as well as columns arguing that the price caps on merchants will shift the cost of debit card transactions to consumers.
HuffPo’s skepticism of this Dodd-Frank provision mirrors that of Democrats on the Hill who have signed on to measures calling for a delay of the rule’s implementation date to study its effects on consumers, community banks and credit unions. These include some of the most liberal members including new Democratic National Committee chairman Debbie Wasserman Schultz (D-Fla.), Congressional Progressive Caucus co-chair Lynn Woolsey (D-Calif.), and even Dodd-Frank coauthor Barney Frank (D-Mass.) himself. They have asked what exactly is so progressive about a rule that puts more money in Wal-Mart’s pockets and leaves consumers with fewer services such as free checking and higher fees as part of the cost-shifting for debit card transactions.
Baker tries to counter this skepticism among fellow progressives be claiming banks make a large unjustified profit. He asserted: “The Fed estimates that the networks can cover their overhead and operating costs with a fee of 12 cents per transaction. The difference, which comes to $12 billion a year, is pure frosting.”
But to whip up this “frosting” with Fed findings, Baker has to cook a lot of statistical fudge. The Fed did set the price cap at 12 cents, but it never said it would cover “overhead and operating costs.” In fact, the Fed stated clearly that this wouldn’t come close to covering many of banks and credit union’s costs, but that the statute wouldn’t allow it to set the price controls any higher.
In its proposed rule issued in December, the Fed stated that its “formulation includes only those costs that are specifically mentioned for consideration in the statute.” It admitted that “this measure would not consider costs that are common to all debit card transactions [emphasis in original],” and that the rule “may prevent issuers from recovering through interchange fees some costs associated with debit card transactions.”
The drastic effects of these below-cost price controls could cause stress to electronic payment systems that will even ensnare the very retailers lobbying to keep the Durbin Amendment. This was underscored yesterday by a warning by Federal Reserve Chairman Ben Bernanke that as written, the Fed rule may cause some community banks to fail. All the more reason to pass bipartisan bills like S. 575 that will put in a time-out and study of these disastrous price controls set to go into effect on July 21.