Retailers Only Sell Half a Loaf in their Analysis of the Costs of Interchange Fees
In a comment on my American Spectator article on the deleterious effects of debit card interchange fees on American households, Sara Durr, Spokesperson for the Merchants Payments Coalition, says
Mr. Murphy [sic] completely distorts the truth about debit swipe fee reform in the U.S. According to a new comprehensive report by noted economist Robert J. Shapiro, reducing the swipe fees for merchants actually put $5.8 billion back into the hands of consumers through lower prices, which led to sufficient increased spending to support 37,501 new jobs in 2012. Savings and job gains would have been substantially larger—to the tune of an additional $2.79 billion in consumer savings and 17,824 jobs—if the fees had been cut to 12 cents as originally recommended by the Federal Reserve Board
As this finding was completely at odds with the study I had cited in my article, I looked for it and found it here. Interestingly, it is entitled “The Costs and Benefits of Half a Loaf,” which is precisely what it studies. Unless I have missed something, it estimates only the putative savings to consumers at the point of sale. In so doing, it ignores the other half of the equation – the increased costs to bank card users from banks needing to make up a sudden shortfall in revenue as a result of this regulation. That’s exactly what the Evans et al. study I cited in my article does include. That study does indeed find that some savings to merchants — although not all — were passed on to the consumer, but those savings were more than wiped out by the increased banking fees, never mind such intangibles as the loss of reward programs. The full loaf is smaller now than it was before the “consumer-oriented” regulation went into effect.
That also doesn’t take into account other unquantifiable costs. I have been told (and I will post again when I have some linkable evidence to substantiate this) that the regulations have increased banking costs so much that over a million former bank customers are now “unbanked” — i.e., they closed their accounts rather than pay the fees. If true, that makes them less able to participate in a host of transactions that require a bank account. That total welfare cost could be substantial.
In other words, you can’t just look at half a loaf.