In passing the financial regulation bill, U.S. Senators made a point of how they were going after the “fat cats” on Wall Street.
But one amendment the Senate passed would enrich another group of fat cats: the multi-billion dollar big box store chains. With a strange vote count of ten Democrats voting “no,” but 17 Republicans (including some conservatives normally against price controls) voting “yea,” the amendment requires the Federal Reserve to put price controls on the interchange fees that banks charge merchants for processing debit cards.
On the Senate floor, Majority Whip Dick Durbin admitted how he was persuaded by the head of Walgreens, the nation’s largest drug store chain that is headquartered in his state, complaining about the cost of interchange fees.
“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—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 nations 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 but community banks, credit cards, and consumers who would see the costs of processing a card shift to their pockets.
Interchange fees, often dismissively called “swipe fees” by merchants groups, average about 1.75 percent of a payment card transaction. But they benefit merchants in a myriad of ways from increasing business to decreasing the costs and risks of handling cash and checks, virtually eliminating a range of problems in accepting payments from employee theft to check fraud.
Durbin, whose amendment requires the Federal Reserve Board to set “reasonable and proportional” interchange fees for debit cards, parrots merchants’ spin that the costs of processing a payment card are little different from that of cashing a check. Durbin argued on the floor that if a customer pays with a check, there are “no fees involved,” but “if you use a debit card, a debit card which would take the money directly out of my checking account, the same as my check, the interchange fee is applied.”
But the costs of a debit card are not “the same” as a check, and this is why many retailers now refuse to take checks. With checking, the retailer is on the hook for nonpayment from a bounced or fraudulent check. With debit and credit cards, the issuer takes on 100 percent of the risk of nonpayment.
Moreover, as noted in a study by the Government Accountability Office, processing and receiving checks from a customer’s personal funds can take five days, but retailers typically retrieve card payment within one to two days. These are some of the reasons why most retailers themselves have decided the costs of accepting credit and debit cards, when compared to cash and checks, are worth paying.
With the Durbin amendment and other measures, retailers are trying to push this cost off for someone else to pay. And, in looking at the effects of interchange price controls in other nations, this someone else will almost certainly be consumers.
This would shift these costs directly to consumers in terms of reduced rewards such as airline miles and the likely return of annual fees. This is exactly what happened when the Australians slapped on these controls on credit and debit cards, the U.S. Government Accountability Office recently found. The GAO and others also concluded that none of the retailer savings were passed on to consumers in terms of lower prices for their goods. The GAO also found that these controls would hit especially hard the revenue from interchange fees from credit unions and community banks, and hurt their ability to issue cards.
I, of course have nothing against big retail chains. In fact, I have argued against other provisions in the bill that would regulate retailers that extend credit as banks. But they shouldn’t be able to get their costs reduced by having the government impose corporate welfare schemes at the expense of American consumers.