Dick Durbin Is Stealing Your Free Checking!
In the battle against Obamacare, the first chinks in the law's armor were resolutions against the law by state legislatures. These resolutions led to court cases that have been victorious in two instances, and a new majority in the U.S. House Representatives that voted to repeal the law.
On Tuesday, the first salvo was fired against another command-and control scheme of the last Congress -- from the newly purple state of Michigan. There, the state Senate, following the state House last Friday, passed the first resolution against a provision of the 2400-page Dodd-Frank financial "reform" of 2010.
In an amazingly unanimous vote, the Republican and Democrat state senators condemned a specific amendment from U.S. Senate Majority Whip Dick Durbin (D-Ill.) and the corresponding proposed rule from the Federal Reserve implementing a debit price control scheme that benefits Walgreens, Home Depot, and some of the nation's biggest retailers and shifts costs to consumers in terms of loss of free checking, higher bank fees, and reduced card rewards.
Referring to "Section 1075," also known as the Durbin Amendment, the resolution states: "We urge Congress to stop or delay the implementation of Section 1075 so that statutory changes can be made… to ensure Section 1075 does not result in increased fees on consumers." The resolution also expressed concern that the Durbin Amendment would harm credit unions and community banks, which were given technical exemptions that turned out to hardly shield them from the law's costs.
This may not yet be Waterloo for the Durbin Amendment, let alone Dodd-Frank, but it will certainly add to the increasing scrutiny -- scrutiny that will be under way today at a hearing of the House Financial Services Committee. It's also difficult to imagine a more stinging defeat for a Senate Majority Whip than to have all the members of his own party in the legislative chamber of a state in close proximity to the one he represents vote to condemn his amendment and one of his pet causes.
But then in pushing these price controls on behalf of retailers, Durbin has been quite arrogant, even for a politician. In one of those rare moments of politicians acknowledging the true masters whom they serve, Sen. Durbin admitted on the Senate floor that the CEO of Walgreens, headquartered outside of Chicago in his home state, called him to complain that the transaction fees Walgreens pays to process debit and credit cards were "the fourth largest item of cost for their business." Durbin actually argued that relieving costs of doing business for a company that makes $2 billion in annual profits was a reason to support price controls on what it pays for financial services.
But when the Fed issued its rule in December, it even exceeded Durbin's order, filling the Christmas wish lists of Walgreens and other merchants while giving their customers several lumps of coal. If the Durbin Amendment isn't repealed or delayed soon, American consumers will be losing their free checking, seeing the return of annual fees, and getting significantly reduced reward points for the purchases they make with plastic.
Indeed, consumers have already been paying for the anticipated costs of the Durbin Amendment. "Free checking as we know it is ending," reported the lead paragraph of an Associated Press story in October, and the article listed as one of the main reasons "the new regulations limit fees the bank can collect when retailers accept debit cards."
Under the proposed rule the Fed put forward for regulation of interchange fees -- the fees card issuers charge retailers to process debit card transactions -- merchants will never pay more than 12 cents for any customer's transactions, whether it's for $1.00 or $10,000. This goes far beyond even the language of the pro-retailer Durbin Amendment, which required the Fed to "establish standards" to assess whether interchange fees were "reasonable and proportional to the cost," but did not specify what these fees should be.
According to the Associated Press, the Fed said that average interchange fees in 2009 ranged from 44 to 56 cents. This means that the 12-cent cap will cause a 70 to 90 percent drop in revenues for the banks and credit unions that issue debit cards. And By the Fed's own admission, this will not come close to covering the cost of processing debit card transactions, let alone allow the banks and credit unions to make a profit from what they charge retailers for the valuable services of electronic payments.
Retailers claim such severe price controls are necessary because the Visa and MasterCard networks dominate in payment cards (which are actually issued by thousands of banks within the networks). But the structure has mostly survived antitrust challenges, and as with retail itself, which is dominated by big players like Walgreens and Home Depot, there are options to choose from. There are alternative payment systems such as PayPal, and the Fed rule itself notes that there are a "number of" national debit card payment networks.
And stores always have the option of only taking cash or providing discounts for cash. If stores take a debit or credit card, they are making a business decision that they will earn more money with it than without it as well as get protection from the costs of fraud from bad checks and from theft of cash in the register.
Even in the case of "natural monopolies" like utilities, it is unwise and likely unconstitutional public policy to outlaw profit, let alone to force pricing below cost. According to Professor Richard Epstein, a constitutional law and property rights expert on the faculty of the New York University Law School, this rule is the federal first price control scheme in U.S. history in which businesses, by design, are required to sell their products or services below cost. He says in an interview that even under the gasoline price caps of the '70s, "no one was asked to sell below cost."
And this is not only horrible policy; it also likely crosses a constitutional line. As argued by a lawsuit challenging the Durbin Amendment from Minneapolis-based TCF National Bank, on which Epstein is serving as an attorney, the fee controls likely violate both the Due Process and Takings Clauses of the 5th Amendment because they deprive banks and credit unions that issue cards of their property rights to a return on capital invested. The Supreme Court in its 1989 case ,affirmed 8-1 that a government-set "rate is too low if it is so unjust as to destroy the value of the property for all the purposes for which it was acquired."
But according to the Fed, the 12-cent cap creates "an incentive to control costs." And besides, the Fed points out, "the interchange fee standard would not limit the ability of an issuer to earn revenue from other sources, such as by charging fees to its cardholders." Gee, what a pro-consumer Fed!
The big retailers claim that if they pay less in fees, they'll pass on the savings to consumers. But if Australia's experience in capping interchange fees for credit cards in 2003 is any guide, this just ain't so.
George Mason University law professor Todd Zywicki noted in theWall Street Journal, "Annual fees increased an average of 22% on standard credit cards and annual fees for rewards cards increased by 47%-77%. Card issuers also reduced the generosity of their reward programs by 23%." But Aussie consumers experienced no corresponding decline in retail prices. A study by the Government Accountability Office of the U.S. Congress found no "conclusive evidence" that any of the Aussie retailers' $1.1 billion in savings had been passed on to consumers.
The good news is there are efforts underway in Congress to delay or repeal the Durbin Amendment, and at the national level as well as in Michigan, even some Democrat Dodd-Frank supporters have pulled back, correctly perceiving that this measure and the Fed rule implementing it make a mockery of their claim that Dodd-Frank was a victory for consumers over special interests. Even former House Financial Services Committee Chairman Barney Frank (D-Mass.)criticized the Fed on CNBC for setting the fees "too low" and said he'll work with the GOP to change the rule, but was short on specifics.
Meanwhile, watchdogs like the Tea Party movement also need to watch over the GOP on this issue, including some in Congress they may normally count as their own. Seventeen Republicans voted for the Durbin Amendment in the Senate last May, including some ostensible conservatives who would oppose price controls in most other contexts. Georgia Sens. Johnny Isakson and Saxby Chambliss voted aye, for instance, after heavy lobbying from Atlanta-based Home Depot, a firm that American Banker described as "on the warpath" against interchange fees. (The full list of which senators were naughty or nice on their votes on the Durbin Amendment is here.)
Conservatives and libertarians are often sympathetic to retailers and with good reason. They are hit with the taxes and regulations of Big Government and threatened with coercive measures from Congress such as union "card check." Yet when the leaders of their industry lobby for price controls, we must say in unison, "No sale!" This is what several groups in the Center-Right Coalition -- from CEI and Americans for Tax Reform to Phyllis Schlafly's Eagle Forum -- have already done in a letter last summer asking the Durbin Amendment be dropped from the pending bill. A new letter sent yesterday by some of these groups reiterates the call for repeal.
(Note: The Fed is taking comments on the rule through Feb. 22, and you can send them your thoughts email@example.com. Or go here and follow the instructions for submitting comments. If you wish to share your views on whether Congress should repeal the Durbin Amendment's price controls, or delay the date the Fed implements them, you can e-mail your members of Congress or call them through the general number of (202) 224-3121.
Meanwhile, it wouldn't hurt to have some Tea Parties in front of your neighborhood Walgreens and Home Depot communicating that if they want you to shop in their stores, they'll have to stop lobbying to take away your free checking and card rewards!)