Give Dick Durbin some credit for his chutzpah. It’s not every lawmaker who, in proposing an amendment to a financial reform bill ostensibly aimed at targeting “fat cats,” would admit that the inspiration for his measure was a Fortune 500 CEO.
But that’s just what the Senate Majority Whip who represents Illinois did when introducing his amendment to the financial regulation bill to control how much credit and debit card issuers charge merchants to process their cards. In a Monday speech on the Senate floor, Durbin related how he was moved after the CEO of Deerfield-Ill.-based Walgreen Co., the nation’s largest drugstore chain, contacted him to bellyache about these costs.
“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—called 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—which may come to a vote as early as today—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.
But 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.
In reviewing Australia’s caps on interchange fees, for instance, the GAO noted in its November 2009 study that in response to these controls, card issuers “reduced rewards and raised annual fees” for Aussie card holders. Worse, it appears that none of the $1 billion in savings that merchants received as a result of lower fees were passed on to consumers in the form of lower prices., the GAO noted.
The GAO also found that interchange fee controls would make it harder for smaller banks and credit unions to compete, because making payment cards less profitable per transaction would give the advantage to large banks that can process transactions in greater volume. “With less interchange fee income, representatives of smaller issuers such as community banks and credit unions told us they likely would not offer rewards cards,” the GAO reported.
Durbin attempts to respond to these concerns by exempting banks and credit unions with less than $10 billion in assets from the debit card fee controls. But a letter co-signed Wednesday by the Independent Community Bankers of America and the Credit Union National Association makes clear that there is no way to shield smaller institutions from the effects of these controls. “By directing the Federal Reserve to regulate only the debit interchange of big banks,“ the letter states, “the amendment makes our institutions’ debit cards the most expensive for a merchant to accept—something the merchant will not tolerate for long.”
If Congress really wanted to lower costs for the nations retailers, as well as consumers, it could scrutinize the cost of its own red tape from the laws it imposes as well as the new costs for retailers from the Senate financial bill itself. Many big and small merchants have legitimate concerns, for instance, that the new Bureau of Consumer Financial Protection will subject them to costly bank-like regulations if they extend credit as a minor part of their business, such as in providing layaway plans.
But Durbin has opposed efforts to exempt retailers such as auto dealer from the new agency’s control. In a conference call with reporters, Durbin asked “why would be ever exempt them from this type of consumer financial protection” when consumers need to be protected from “trick and the traps” of all businesses.
Yet he doesn’t seem to mind the “tricks and the traps” of his own amendment that would shift costs to consumers and provide corporate welfare to his beloved constituent Walgreens and other retail giants.
John Berlau is director of the Center for Investors and Entrepreneurs at the Competitive Enterprise Institute. For more info on this issue, see the study he co-authored Payment Cards Networks Under Assault: How Capping Interchange Fees Will Hurt Consumers, Charities Community Banks, and Credit Unions.”