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Friday, January 13, 2012

Debit Card Price Controls Hurting Small Merchants

Can consequences be both unintended, yet completely predictable? Well, consider countless actions taken by elected officials and their appointees that ignore inevitable negative economic consequences.

Price controls serve as one of the most glaring examples. When government decides to limit the price that can be charged for goods or services (and therefore, limit returns as well), the inevitable results include shortages, diminished quality, less investment and innovation, reduced service, and/or cost shifting.

That, of course, is exactly what's occurred since Congress via the Federal Reserve imposed price controls of debit card transaction fees. The 2010 Dodd-Frank financial regulation law included the Durbin amendment - named for Senator Richard Durbin (D-IL) - which imposes price caps on debit card interchange fees paid by merchants for each debit card transaction. Those price controls took effect on October 1, with fees capped at 21 cents per transaction, or less than half of what the average fee had been.

Various large retailers were behind this price control effort - something, by the way, they would be vehemently opposed to if the government sought to place price controls on their own businesses. Their claim was that consumers were paying more, and would experience savings if the price controls were imposed. In addition, small businesses supposedly would benefit.

It turns out, however, that consumers and small firms are not faring so well under this price control regime.

As for consumers, on December 13, The Wall Street Journal reported: "The Electronic Payments Coalition, an advocacy group that represents banks and credit unions, says 76% of retailers either raised prices or kept them the same since the lower fees were introduced... Large retailers are reaping the benefits but not giving back the rewards, analysts say. On average, customers are paying 1.7% more for the same items after Oct. 1, according to the study."

This initial assessment, again, was completely predictable, as retailers would have little incentive to pass on specific cost reductions related to government controls, and given the findings from other nations, such as Australia, that imposed price controls but no price benefits were found to be passed on to consumers.

Meanwhile, small businesses have found that they actually are paying, in many cases, higher debit card transaction fees. As a wide array of media reports attest, on low-dollar purchases, generally less than $10, the 21-cent government price control has replaced a previously lower fee. Due to the price controls being imposed, previous discounts on small charges have been eliminated. Vending machine operators, for example, have seen per transaction fees increase by 200 percent in some cases.

As the December 8 Wall Street Journal noted: "‘There will be some unhappy parties, as there always is when the government gets in the way of the free-market system,' says Chris McWilton, president of U.S. markets for MasterCard Inc. He said the company decided that it couldn't sustain the discounts under the new rate model because the old rates had essentially subsidized the small-ticket discounts. Merchants now are trying to offset their higher rates by raising prices, encouraging customers to pay in cash or dropping card payments altogether."

Again, all of this was completely predictable, and was predicted by the Small Business & Entrepreneurship Council and others who grasp the basics of economics. Amazingly, though, some are arguing for even tighter price controls. But that, of course, would only make matters far worse, particularly in terms of restricting investment and innovation in card payment systems.

The correct response is to repeal the destructive and costly Durbin amendment. That's exactly what U.S. Reps. Jason Chaffetz (R-UT) and Congressman Bill Owens (D-NY) have proposed to do in legislation introduced in October. It would repeal the debit card interchange price control provisions of the Dodd-Frank bill. Here is legislation that makes economic sense, and deserves bipartisan support.


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.

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