Dodd-Frank Durbin Amendment Shifts Costs to Consumers

In my last column, I blasted 17 Republican senators who voted last year for Dodd-Frank’s Durbin Amendment, which puts below-cost price controls on what credit unions and banks can charge retailers for processing debit card transactions.

Now it’s time for equal time for a prominent liberal supporting these price controls, even though they benefit big retail chains at the expense of community banks, credit unions and consumers. In other words, he is supporting big government for big government’s sake. 

Here is my response to Thursday’s New York Times column by Simon Johnson, a leading progressive economist, who I argue is not very progressive in defending big retailers’ statist and anti-consumer prerogatives.

The good news is that prominent voices on the left and right are getting wise to this retailer rip-off. These include Dodd-Frank author Barney Frank, D-Mass., who has now called for this specific section of his law to be repealed, and Rep. Debbie Wasserman Schultz, the incoming Democratic National Committee chair. And on the center-right, leaders of 33 groups — from the Competitive Enterprise Institute and Americans for Tax Reform to the Christian Coalition of America — have signed a letter supporting bipartisan bills to delay the Durbin Amendment. 

Smart figures on both sides are appalled by the government intervening with price controls that put more money in the pockets of big retailers like Walmart and Home Depot at the cost of free checking and reward points for consumers.

Anyway, here’s the response I sent to the Times, which was posted among the “Reader’s comments.” (Note: I mean no disrespect by my first-name reference to Simon. I called him that for purposes of space, and because we slightly know each other, having debated financial regulation in Public Radio International’s “To the Point.”):

This column is the classic example of utilizing the “my enemy’s enemy is my friend” philosophy without looking at what the consequences would be.

It’s unfortunate that — in contrast to prominent liberals in Congress such as House Financial Services Committee Ranking Member Barney Frank and incoming Democratic National Committee Chairman Debbie Wasserman Schultz — Simon is allowing his dislike of the big banks to drive him into bed with giant retail chains such as Wal-Mart and Home Depot who are demanding corporate welfare at the expense of consumers, community banks, and credit unions. 

FDIC Chairman Sheila Bair, not known as a friend of the big banks, states on Durbin’s interchange price controls, “The likelihood of this hurting community banks and requiring them to increase the fees they charge for accounts is much greater than any tiny benefit retail customers maybe get.”

Simon simply does not have command of the facts when he asserts that community banks and credit unions would not be affected by the Durbin Amendment. Both the Credit Union National Association and Independent Community Bankers of America strongly argue that the partial exemption isn’t worth the paper it’s printed on. 

Ben Bernanke agrees, recently stating, “Because networks will not be willing to differentiate the interchange fee for issuers of different sizes it is possible that that exemption will not be effective in the marketplace.” And because of the “routing” rule in the measure — for which the exemptions specifically do not apply — retailers have the power to disregard contracts and go to a cheaper card network (including less secure networks in foreign countries) if the exempt banks and credit unions don’t play ball and lower their fees.

The experience of Australia’s price controls on interchange fees that Simon specifically cites serves as an argument against the Durbin Amendment. As I wrote last year in NYT’s Room for Debate on the winners and losers from Dodd-Frank: “Overwhelming empirical evidence indicates consumers — whom this bill is ostensibly aimed at protecting — will lose out. Congress’ Government Accountability Office found last November that after interchange price caps were pushed through in Australia, card issuers ‘reduced rewards and raised annual fees’ for Australian card holders. And it found no evidence of the $1 billion in savings that merchants received as a result of lower fees being passed on to consumers in the form of lower retail prices.”

What this comes down to is retailers simply wanting a free ride at everyone else’s expense. Contrary to Simon’s assertion, the costs of processing debit cards are not “quite low,” and a debit card is not the equivalent of a check. The main difference is that when checks bounce, the retailer is on the hook. But with debit cards, retailers get full payment guaranteed even when cardholders overdraw their accounts. 

A study last year by the center-left New America Foundation concluded that when guarantee of payments and other benefits of debit and credit cards to merchants are accounted for, “accepting card payments more than pays for itself.”But the Durbin Amendment’s cap of just 7 to 12 cents on any size debit card transaction — a price that by the Fed’s own admission is set below fixed and many variable costs — virtually assures that almost the entire costs will be shifted to consumers. 

Big retailers are already licking their chops. As the NYT reported, a Home Depot executive recently bragged to investors that the price controls would let the company pocket about $35 million a year. No mention was made about passing any of this windfall on to the store’s customers.

So if “progressive” means improving consumer welfare, rather than simply advocating more government power for its own sake, what exactly is so progressive about Durbin’s price controls?