Federal Reserve's Interchange Price Controls: Gift to Retailers, Lump of Coal for Consumers
Washington, D.C., December 16, 2010 – This afternoon in a public meeting, the Federal Reserve will release draft rules to implement Dodd-Frank's Durbin Amendment, which places price controls on what banks and credit unions can charge retailers for interchange fees to process debit card transactions. The Competitive Enterprise Institute's John Berlau notes that the law encourages price controls that are below-cost, and merchants' trade associations are arguing that interchange fees they pay should be "at par" or zero.
Berlau explains how this "free lunch" for Wal-Mart, Walgreens and some of the nation's wealthiest retailers will be paid by shifting the costs of maintaining the payment card system to the pockets of consumers -- through the loss of free checking, card rewards and the return of annual fees. He also demonstrates how the Durbin Amendment will hurt community banks, credit unions and may even violate the 5th Amendment.
On Thursday, the Federal Reserve — at the direction of Congress in the Durbin Amendment to the Dodd-Frank financial “reform” bill — will give a giant gift to some of the nation’s biggest retailers. This present is in the form of direct and indirect price controls on the interchange fees they pay to financial institutions to process debit cards payments.
Yet unless Congress acts to delay or repeal the Durbin Amendment, consumers, community banks, and credit unions will be getting a large lump of coal in their stockings by next December as the expenses of running an efficient payment card system are shifted almost entirely onto their shoulders. Consumers have already seen the costs of this rule through the loss of free checking as a result of banks’ anticipation of an estimated 60 to 80 percent loss of revenue from merchant fees. Moreover, the price controls and other provisions of the Durbin Amendment will like reduce investment and innovation to counter emerging hacking and security threats to the payment system.
The Durbin Amendment regulates the debit card issuers as public utilities — something they are not, as the amendment itself makes reference to a “the number of payment card networks” — but it sets price controls more severe than even rate regulation for local phone companies and utilities by not even explicitly allowing for profit.
For more information:
› Berlau will be attending the Federal Reserve Meeting this afternoon and will be available for interviews outside the Fed building, in-studio or over-the-phone.
He can be reached at email@example.com or at his cell, (202) 415-3192 › Read more by John Berlau on CEI.org.