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.

"Told You So" on Durbin Amendment

U.S. Senator Dick Durbin (D-ND) is outraged, urging a de facto run on Bank of America. President Barack Obama is disgusted as well, taking a swipe at banks in an interview with ABC News.

What's the beef?

Well, in recent days, Bank of America, along with SunTrust, announced $5 per month fees on debit card transactions. For good measure, Chase and Wells Fargo are testing $3 per month debit card fees.

Of course, what Senator Durbin and President Obama fail to mention is that these fees are the direct and predictable results of policies that they advocated and imposed on banks.

Specifically, the Durbin amendment to the 2010 Dodd-Frank financial regulation law imposed price caps on debit card interchange fees paid by merchants for each debit card transaction. The Federal Reserve carried out the price cap mandate, slashing the effective interchange fees by more than half, costing banks, according to various estimates, as much as $15 billion annually.

As the Durbin amendment was proposed, debated, passed and wrestled with by the Federal Reserve, SBE Council and many others were clear in terms of laying out what the inevitable consequences would be. That included, as spelled out in a June 2010 SBE Council analysis, that "price controls never work the way they are billed, always imposing costs that come in various forms, and usually hurting those meant to be helped," adding that the likely fallout would include increased costs on debit card and checking account services.

Predicting such an outcome required no great insights. Instead, all that's needed is a basic understanding of economics. As noted in another SBE Council piece: "Keep in mind that suppliers adjust prices in two ways. They can change the money price or the quality of the product. When government steps in to limit money prices, sellers can reduce the supply of the product, reduce the quality, and/or raise prices of related goods or services."

After handing out big bailout bucks to various financial institutions, the political winds have shifted, and now the banks are the bad guys, worthy of political bashing. But the banks are not to blame. Instead, it is public policy rooted in economic ignorance. Price controls on debit card interchange fees were inevitably going to result in costs and part of those costs have materialized in the form of debit card fees.

So, we have what can be called the Durbin-Obama bank tax on consumers, including, of course, small businesses that use debit cards.

All we can say is: Told you so.

_______

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.

Reg Kills Competition in e-Payments

The fallout from intrusive government regulation into the marketplace is no mystery. Costs increase, competition suffers and consumers face reduced choices and/or higher prices.

Price controls serve as glaring examples of the ills of government regulation. When government decides it is going to set the price for a good or service, the inevitable results include reduced investment and innovation, less competition, and increased costs for consumers in the end.

Consider the most recent fallout from the federal government's foray into price controls on debit card transactions through the Durbin amendment included in the Dodd-Frank financial regulation bill.

Reuters reported on May 13 how this price control regulation clearly has translated into less competition in the payments network arena. Specifically, the payments venture Isis, a joint venture from AT&T, Verizon Wireless and T-Mobile USA, declared that "it was seeking to work with Visa and MasterCard, scaling back plans to build a new, separate network."

Why? Reuters noted the following:

• "John Stankey, AT&T's head of business solutions, on Thursday partly blamed the Dodd-Frank financial reform law for the retreat. The law's ‘Durbin amendment' will make payment processing less profitable by restricting the fees that merchants pay banks and networks every time a customer buys something with a debit card."

• "‘Some changes in the banking laws occurred with the amendments that were put in with the Dodd-Frank bill ... As transaction fees were limited and things were changed, it kind of changed the business model,' said Stankey, speaking ahead of next week's Reuters Global Technology Summit."

• "Isis told regulators in a February letter that the proposed debit fee limits would ‘hamper the development of new payment and commerce systems, and limit the number of new entrants into a payments market already dominated by a few major networks.'"

Indeed, why make such a considerable investment when the government is limiting prices, and therefore, limiting returns on investment?

As Reuters also pointed out, the Federal Reserve must still finalize rules that are meant to take effect in July. These price controls "are expected to cut annual debit processing fee revenues to about $10 billion from $23 billion" a year.

Consumers already are experiencing less choice and higher costs than otherwise would have been with the dramatic shift in the Isis payments plan.

There are efforts in Congress, though, to eliminate or delay the Durbin amendment. For example, Senator Jon Tester (D-MT) has proposed the Debit Interchange Fee Study Act, which, according to the CRS summary, would "extend from 9 months after the date of enactment of the Consumer Financial Protection Act of 2010 to 24 months after the date of enactment of this Act the rulemaking timelines and effective dates for the proposed debit interchange (swipe) rule of the Board of Governors of the Federal Reserve System (Board) that is required by the Dodd-Frank Wall Street Reform and Consumer Protection Act." Banking regulatory agencies would be required to study the impact of regulating these debit card transaction fees.

At the very least, delay is in order. But economic common sense dictates that such price controls be eliminated, and the sooner the better in order to remove uncertainty and provide incentives for innovation, investment and competition.

_______________

Raymond J. Keating serves as chief economist for the Small Business & Entrepreneurship Council.

Debit Cards Up, Credit Cards Flat or Down?

In the current economic climate, it’s not surprising that credit card purchases might be growing more slowly or declining. What’s interesting is that debit card transactions apparently continue to grow, and now outstrip credit card purchases for Visa Inc.

On Thursday, April 30, The Wall Street Journal reported the following that should be noted by small business owners:

• “On Wednesday, Visa Inc. reported that the total dollar volume of purchases made using its branded debit cards surpassed credit-card purchases for the first time during the last three months of 2008. The $206 billion in U.S. debit-card transactions processed by Visa were 50.4% of the San Francisco company's total transaction volume in the period, up from about 40% in 2003.”

• “The surging popularity of debit cards largely reflects the growing use of plastic by American consumers. Credit- and debit-card purchases of retail goods and services vaulted past cash and checks in 2003.”

• “Unlike credit cards, which have balances that can be carried month-to-month, debit cards immediately deduct funds directly from a checking account. Debit cards are especially popular with younger consumers.”

• “To be sure, growth rates of debit-card transactions have slowed as Americans rein in their spending. Volume is widely expected to climb by a single-digit percentage this year, compared with more than 10% annually during the past few years. But credit-card usage is expected to keep declining.”

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council