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The Economist: Interchange Fee Caps Benefit Large Retailers at Consumer Expense

Surprise! Price controls lead to unintended consequences—including transfers of wealth to parties who lobbied for those controls.

That’s the actual – and unsurprising – result of the an amendment to the 2010 Dodd-Frank financial reform bill, sponsored by Sen. Richard Durbin (D-Ill.) that caps fees charged by banks for payment cards, mainly debit and credit cards. As The Economist reports:

[T]he limits on “interchange fees”, as the financial jargon has it, have not worked out as planned. They have resulted, by one calculation, in the transfer of between $1 billion and $3 billion annually from poor households to big retailers and their shareholders. These were not the beneficiaries Mr Durbin had in mind when the amendment came into effect three years ago this week.

Or are they? This result is exactly what I said would happen. And as I noted at the time, Sen. Durbin was quite open about whose interests he had in mind.

“I had the CEO of Walgreens contact me last week,” Durbin related on the floor, “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.”

Durbin then tried to argue that these processing fees – called the interchange fee – hit small firms as well. But some of the strongest advocates calling for direct and indirect price controls on these merchant fees are some of the nation’s biggest retailers such as 7-Eleven Inc., Home Depot Inc., and Overstock.com Inc.

And contrary to their spin, it’s not just “big banks” and credit card companies who would be hurt by interchange fee price controls such as in Durbin‘s amendment – which may come to a vote as early as today – but community banks, credit cards, and consumers who would see the costs of processing a card shift to their pockets.

No surprise there.

Here’s the International Center for Law and Economics study cited by The Economist. It’s co-authored by Competitive Enterprise Institute board member and George Mason University law professor Todd Zywicki.

And here’s an amusing person-on-the-street video in which consumers respond to whether they’ve seen any of the savings from the Durbin Amendment that big retailers were supposed to pass on.