Tell a good story, get good results. This was the basis of the small behavioral economics experiment, I conducted for a graduate class, as described in my previous post. Politicians are great at this. Take for example Assistant Senate Majority Lead Dick Durbin, who made a compelling case for saving Americans and small businesses from the fees credit card companies charge retailers. But in the text of the final act, the amendment only restricts fees charged by debit cards and allegedly bases these fees, without taking into account other costs of the transaction. Last week, Minnesota based-bank TCF Financial Corp. called the federal government out on this amendment and sued Ben Bernanke and the Federal Reserve, calling the act unfair and unconstitutional.
The amendment is intended to lower debit “swipe fees,” which amount to an annual cost to consumers and retailers of $19.7 billion or 1.6 percent of sales, as reported by Bloomberg. A routine trip to a gas station or local pizzeria, might remind the average consumer of one basic principle of business in today’s electronic age: cash is king. Many small businesses ask customers to make a minimum purchase to use a debit or credit card and many gas stations offer lower prices for people paying with cards. Allowing these practices is the idea behind the “Durbin amendment,” according to a public statement issued Assistant Senate Majority Lead Dick Durbin. The amendment of Dodd-Frank, grants the Federal Reserve the right to regulate interchange transaction fees banks and credit card companies charge is electronic transactions. In the public statement, Durbin argues: “Requiring debit card fees to be reasonable, and by cleaning up Visa’s and MasterCard’s worst abuses, small businesses and their customers will be able to keep more of their own money.” Banks receive most of the money from these “swipe fees,” according to Bloomberg. Anyone who has stood on line waiting for the customer with a card to figure out how to reach the minimum for using a card can sympathize. In addition, the extra money from “swipe card” fees could be used by retailers to reinvest in the company.
But in a press release issued by the company, TCF argues the amendment directs the Fed to measure the costs of authorizing, clearing and settling debit card transactions and set debit card interchange rate based on just these costs, without taking into account other expenses. The Minnesota based bank further contends that the government has never passed a law, forcing to a business to sell a product below cost. The spirit of this law suit, though flawed in some ways has at least one valid point. The amendment requires a government agency to set a price for a service, which should be regulated by the free market. Whether or not these fees are burdensome, the bank has a right to charge for services rendered, like any other company. This violates the principal of a free market economy and punishes the bank for issuing the debit cards that allow these business to be paid for their services. So although, the amendment save small businesses money, it does so at the expense of the banks, possibly causing them to unfairly lose money on a service the provide to small business, which is to help them actually get paid.
In addition, the rule does not apply to credit card transactions, just debit cards issued by the credit card companies. Like many parts of Dodd-Frank, it offers exemptions to large companies, responsible for many of the abuses. While, Durbin’s statement promises to protect the consumer from Visa and Mastercard, it doesn’t regulate what can ultimately be a more costly transaction for consumer. Customers use a debit card in lieu of cash, which can be taken out of their banks ATM free of charge. But if they need to use their credit card to receive cash, they are generally charged with a costly cash advance fee.
But because Visa and Mastercard control about 80 percent of the debit market, according to Durbin’s own scapegoat, he can point to them as the "abusers" without affecting substantially affecting their credit card business. The statement also claims “Visa and MasterCard do not allow banks to compete with one another or negotiate with merchants over interchange rates, and there is no constraint on Visa and MasterCard’s ability to fix the rates at unreasonable levels.” This implies the banks are also victimized by the credit card companies, when the banks are the one receiving most of these fees. This distracts from the fact it is Durbin’s amendment itself violating the free market principles and places the blame elsewhere. His narrative is further enhanced by carefully wording his statement to diminish the fact that these fees will not go away. They will just be lowered. So retailers will not save the 1.6 percent of there final sales but a number substantially less and possibly negligible. At the same time, this will divert billions of dollars from the banking system, possibly at a loss for an important service rendered. If this is the case, what is the motive for banks to continue to offer these services? The question is will these pressures discourage banks from offering debit card, when they could just as easily issue ATM-only cards, giving consumers access to their money, while incurring less cost. But this is not a story consumers and small business want to hear.
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