Shortly before the massive 2010 Dodd-Frank Act was signed into law, Congress approved an amendment to the bill from Sen. Dick Durbin that had nothing to do with financial reform. It instead decreed that the Federal Reserve enact price controls on the amount that debit card processors can charge retailers for using their services. Today’s Congress should be more responsible and undo this costly and unnecessary market intervention.
The premise of the amendment never made any sense. Its supporters claimed that the charges were too high, but the retailers feeding this self-interested argument to politicians were voluntarily choosing to utilize credit card processors’ services. They were doing so precisely because the rates were not too high, such that accepting debit cards as payment provided greater value in terms of increased sales than they cost.
This is how the free market system is supposed to work: to the benefit of all. Why, then, should the government interfere in such contractual agreements?
Rep. Randy Neugebauer, chairman of the House Financial Institutions Committee, has been scratching his head over this same question. He recently introduced a bill, H.R. 5465, which will eliminate this burdensome price control on debit card processing fees, making all voluntary agreements between consenting parties legal again.
Neugebauer’s legislation is a common sense solution to a preposterous problem. But this raises an obvious question — why did the price control even come about to begin with?
As debit cards grew increasingly popular, so too did the popularity of e-payment fraud. In an effort to increase their fraud prevention efforts, which benefits consumers, card companies marginally increased processing fees. This upset certain big businesses. These corporations saw an opportunity to exploit political power to save a few cents extra on each transaction, so they began lobbying Congress to legislate the price increases away.
Senator Durbin gave them what they wanted — thanks to his price control, some businesses now pay less in debit card processing fees. But, as economist Milton Friedman famously said, there is no such thing as a free lunch. The increased cost of card processing has not gone away, it has simply been shuffled onto other groups.
In this case, the cost of fraud prevention has come off the backs of billion dollar corporations and onto the shoulders of bank customers and small business owners. Just months after the Durbin Amendment’s passage, banks were forced to increase the fees charged on checking accounts. As a result, free checking accounts have all but disappeared, and consumers are now forced to pay an additional $8 billion in banking fees each year.
Worse, however, is the fact that card companies have had no recourse but to make up for the revenue losses by charging the same maximum processing fee for smaller transactions as they do for large transactions, saddling small businesses with a sharp increase in business expenses.
Is it really fair to make the local bagel store owner pay the same 22-cent fee on a $1.00 order that a jewelry store owner does on a $350 order? Should consumers really be paying billions of dollars extra a year for a service that businesses are willingly ascribing to?
If the answer to either of these questions is no, then it might be time for Congress to rethink its position on the Durbin Amendment. Thankfully, Rep. Randy Neugebauer’s bill will give the Republican-controlled body a chance to redeem itself and repeal this burdensome mandate. Rep. Neugebauer’s Republican colleagues should hold firmly to their free market rhetoric and run with this sizable opportunity to put their beliefs into practice. Every American with a banking account is counting on them to do so.