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EDITOR OF REDSTATE

Durbin and Federal Reserve Plot to Fix Prices and Harm Consumers

By: Erick Erickson (Diary)  |  March 14th, 2011 at 08:00 AM  | 

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Senator Dick Durbin’s (D-IL) amendment to the Financial Overhaul Bill is set to go into effect in April that will allow Obama and the Federal Reserve to set the prices of debit card interchange fees.

That may sound like a boring topic, but consider this: because of Dick Durbin’s amendment, banks are about to restrict the number of and amount of daily debit card purchases you can make. That’s right. JP Morgan is considering capping your debit card purchases at $50.00 to $100.00 per purchase.

Lenders have repeatedly warned that the proposal, in its current form, will force them to cut benefits on debit-cards and impose new fees and restrictions.

Banks say they are considering many options in response; Bank of America Corp., Wells Fargo & Co. and J.P. Morgan have already begun to revamp debit programs.

(SOURCE)

Why? With the government setting price controls on debit card interchange fees, banks can’t make money off them. Consequently, they’ll be forced to push you and me into actual credit cards to make money. But that’s not all.

The Fed has been talking about capping the interchange fee at 12 cents per transaction, barely ¼ of the current average fee of 44 cents. That means that local banks and credit unions will have to find other ways to make up revenues that will be lost. The banks’ loss, however, is the big box retailers’ gain.

The CEOs, working in cahoots with Durbin and the then filibuster proof Democrat Senate, are thrilled with the extra profits they will make once the rule goes into effect. Home Depot Exec, Carol Tome has said, “Based on the Fed’s draft regulations, we think the benefit to The Home Depot could be $35 million a year,” an amount they are willing to fight for. The lobbying efforts of these merchants have killed any attempts to codify passing savings along to the consumers, guaranteeing that retailers will get all of the profits for themselves.

On the eve of the vote, Wal-Mart donated $20 million to Durbin’s hometown of Chicago; just a small amount compared to the extra profits they plan to line their pockets with once the rule is enacted.

The merchants’ current position is to lobby Republican leaders and ask them to do nothing, which is in fact, allowing Dick Durbin, Ben Bernanke and the Fed to price fix.

In a February hearing of the House Subcommittee on Financial Institutions and Consumer Credit on the Durbin Amendment Interchange Rule, Jeb Hensarling (R-TX) attempted to highlight the lack of consumer benefits this rule will impose when addressing 7-Eleven VP David Seltzer,

“If Congress does not act to delay this for further study, when the Federal Reserve rule is implemented, if I go to the 7-Eleven in Lakewood, Texas, in the Lakewood neighborhood of Dallas, Texas, can I expect a gallon of milk to drop in price? Can I expect a gallon of gas to drop in price?… I expect you don’t know the answer to the question, but I want to make a point here… Do you know what the incremental cost is of producing a Slurpee? I just wonder how 7-Eleven would feel if the Federal Reserve came in with a rule that said you can only recover the incremental cost of selling a Slurpee. My guess is the ice and the fruit flavor don’t cost a whole lot, but you got a lot of fixed cost. I think you get the point.”

So much for consumer protection! Not only can consumers not expect to see prices go down as a result of this rule, many banks are saying that they will have to “abandon free checking and boost other charges to consumers to recover lost revenue,” (Daily Caller). Then there’s the debit card restrictions. Better find that old checkbook wallet.

But merchants need to beware of what they are asking for. Allowing the Obama administration to fix prices could come back to bite them when the next logical step, controlling the price of consumer goods, follows.

Some in the GOP believe that there’s no point in doing anything, since the Senate can’t move a bill. That line of thinking would continue the reckless deficit spending that Harry Reid seems intent to continue.

Thankfully, there is a courageous band of renegade conservatives that need to be commended for fighting for conservative principles. Representatives Spencer Bachus (R-AL), Shelley Moore Capito (R-WV), Jason Chaffetz (R-UT), Jeb Hensarling (R-TX), Randy Neugebauer (R-TX), Jim Renacci (R-OH), Sean Duffy (R-WI) and Senators Bob Corker (R-TN), Mike Lee (R-UT), Rand Paul (R-KY) and Pat Roberts (R-KS) will not take the do nothing bait. They need more conservatives to co-sponsor legislation so the free market can continue.

Let’s just hope they can convince the rest of their colleagues to join in the fight to stop Ben Bernanke from price fixing.

Standing idly by, is an endorsement of Obama Administration price controls and Dick Durbin’s leadership.

It is also an abdication of conservative principles and responsibility.

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COMMENTS

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  • wolfeman

    But I have to on this one. I own a very, very small business. Credit card merchant fees are the #2 largest expense in operating my business, second only to the electric bill. It’s rediculous how much the big banks make off of the fees on card usage. It’s a huge racket now that they have most if not all of the States paying all of the unemployment benefits and everything else directly to debit cards. The banks are racking up unimagineable profits from the use of cards. I run a small convenience store and card use now accounts for over half of my sales. The credit card fees come directly out of my profit. The consumer isn’t paying the fees, the business owner is. It makes me sick to see how much the big banks are making out of my business every year. This is one regulation that will help most all small businesses that accept credit/debit cards. Especially with gas at $ 3.50 a gallon, every bit of the profit on a gallon of gas goes to the bank when a customer pays for gas with a credit card. The store owner is left with zero profit.

  • floridaveteran

    44 cents a transaction is eliminating your profit? Your choice, don’t take the cards. Take checks instead, create your own loadable card. If the federal government can regulate the banks’ charges on their own cards, then they can regulate the prices of the goods you want to sell.

    Or be proactive, add the cost of the transaction fees into your price? Sure you aren’t doing this? Give a discount 3 cents or so per gallon when customers pay cash?

    Don’t expect the government to change the economic system to benefit you. This is the argument the liberals use.

  • Finrod

    If your business would be better off not making sales where the payment is with a credit or debit card, your solution is simple: don’t accept credit or debit cards.

    This is a free country, you’re not required to accept them. Your customers of course if they so choose can go to another business that does, then they get to deal with the banks. It’s your choice.

  • spinoneone

    That is to say, is the businessman better off dealing with cash and checks or is he better off with credit and debit cards? Frankly, each business is different. Lets take a supermarket. They have check readers that automatically debit the consumer’s check to the store’s account, and make sure there are sufficient funds to cover the check. What does that cost the store? More or less than the current debit card fee? Is the fee for using a credit card the same to the store as a debit card? Whether one uses a debit card or a check, the funds disappear from your account immediately, or very soon after one uses either. The days of “float” on a check are long gone. So if you have a “free” checking account both you and the business owner may benefit if you start writing more checks. Remember, too, that banks cannot limit the size of a check you write so long as you have the funds available to cover it. I wonder if they feel the cost of processing checks is less than the cost of handling a debit card transaction? If this keeps up they will certainly find out.

  • acat

    You pay him with actual cash, he takes the bank fees off your bill.. and it adds up fast….

    Mew

  • Paige Dulli

    I have moved more and more to using cash for local everyday purchases like gas, pharma, and groceries. The merchants are happy to take it. Using cash helps me keep a handle on spending, too. It’s more “real” when you take actual money out of your pocket and hand it over.

  • joayn

    “The company reported net income of $17.4 billion for the full-year 2010, an increase of 48 percent compared with $11.7 billion for the prior year.”

    http://www.dsnews.com/articles/jpmorgan-chase-posts-174b-profit-for-2010-2011-01-14

    As a customer of Chase, what did I receive in January? New fee charges for all accounts effective February! For a basic checking account, one could avoid the monthly fee if:

    1. You have at least one direct deposit of $500 or more post to your account (two or more direct deposits that add up to $500 or more do not qualify)
    2. You keep a minimum daily balance of $1,500 or more in your checking account.
    3. You keep an average balance of $5,000 or more in qualifying accounts with Chase.
    4. You have paid other Chase checking related fees of at least $25.

    Plus, they eliminated all kinds of services (free bank checks, for one) for their customers.

    Now I’m sure this is all well and good if folks have that kind of money in the bank. More power to them. I’m happy for them. Really. But what about retirees and part-time workers who will end up paying fees over $1,200 a year if they don’t meet the basic requirements? This is shameful. I know banks have a responsibility to their share holders and I firmly believe and support free enterprise, but they do have a choice to do this or not.

    For those of us who use and need banks, we’re pretty much screwed.

  • ehosterman

    No one requires you to do business with JP Morgan Chase. There are all kinds of regional and local banks who offer different services and fee structures. look for one. Stop whining about the big bad bank.

  • joayn

    should have added the obvious – I did change banks. Thanks for your input!

  • Raven

    for cash and, if they don’t cost you so much, checks…

  • bayoucastine

    Does anyone have information/thoughts on how this may/may not affect purchase by PayPal and other such cards?

  • dx2krudop

    “On the eve of the vote, Wal-Mart donated $20 million to Durbin?s hometown of Chicago; just a small amount compared to the extra profits they plan to line their pockets with once the rule is enacted.”

    Dick Durbin was born and raised in East St. Louis, IL. After College he settled in Springfield, IL, which he eventually came to represent as a Congressman before he replaced Senator Paul Simon. Chicago is not his hometown.

  • jiminga

    Americans will go back to writing checks (I know I will), resulting in slower transaction times for retailers and increased processing costs for the banks….a lose-lose scenario. Those using debit cards now are the folks working on controlling their debt and basically using “cash”, so if they switch to credit cards and pay off the balance each month the banks win and the retailers lose (credit card fees are much higher than debit fees). When the retailers figure this out they should start pushing back, or worse, raising prices.

    Either way, the consumer loses.

  • http://www.thepurpleheart.com/recipient/RecipientDetails.aspx?wid=7f39cbbe-5213-4983-9702-50132a1c73 rsmith7042

    Use cash if your bank limits the amount you can purchase per transaction. Write checks again! Pay off your unsecured debt. If Americans give up credit cards the economy wiLl boom. The gentleman who loses money on card fees, loses nothing if his customers pay cash.

  • norinosnocinos

    they are more customer friendly than big banks.

  • dajeeps

    Back in the day, congress thought it would be a good idea to slap a tax on bank drafts. They did it, and as a result, people stopped using checks and completed transactions in cash instead. But there wasn’t enough cash in the economy to support such a massive migration to cash transactions and it set the stage for the deflationary invironment in the run up to the Great Depression.

    If there’s a cap at $50 per purchase it will impact the health of the economy beyond banks. If banks think they will save money by doing this, they can think again when the lobies of their branches are packed with people at lunch time and after work. It is, after all, the convience of electronic commerce that saves them labor costs. If they kill that, they will pay for it and labor costs are the most expensive part of doing business.

    And of course we don’t know the full extent of the impact to companies like Amazon.com or other internet-based business considering there are many who now have an aversion to debt in any form or can’t use a credit card at all.

    This is just bad.

  • http://www.thejoyofreason.com Greg Garrison

    I make it a point not to talk about work on here (or elsewhere on the Internet, actually),. This has stopped me from writing about this subject, because I don’t want to be seen as promoting my employer or anything along those lines (I work for a financial institution).

    You’ve done an outstanding job explaining this issue. Most people don’t have any idea how interchange works (or even that it exists), or how harmful Durbin, Dodd/Frank, etc will be to the economy overall. It’s like watching FDR take a depression and make it great, all over again.

  • jrg50

    I’ve been in the merchant services business for 20 years. I’m always amazed at the merchant who is not aware that there is No free lunch….and that definitely applies to the costs of handling money. The first thing I always advise a merchant to do is factor his money handling costs into the cost of goods sold.

    Secondly educate yourself about interchange pricing (the bank to bank fees on the backside of each transaction) and the processing fees charged by the providers who bring you the service.

    Next, consider the purchasing trends and preferences of the consumer…and if you don’t like the fees being charged….drop the cards as a payment option and watch what that does to your business. Debit cards are the most preferred means of payment in America, and it continues to grow year to year. Why? Convenience….and brainwashing. People prefer to use Debit over cash, checks and with the credit crunch and eco-situation… credit. Understand that your costs of processing Debit vary between “checking cards” swiped fees, keyed entry fees and PIN Debit.

    You impact your cost by offering differing payment methods. Push PIN Debit and watch your costs dorp and your risk virtually vanish. Many Oil Providers (in a C-Store/Gas Station environment) do the processing for the merchant, and in my experience….most merchants have NO clue of what they are actually paying for this “privilege. I’ve personally saved a CStore Merchant more than $60K annually by revamping his system and means of payment processing. (in this case the Oil company was fleecing the guy…and this happens alot.) Many Oil companies swap out the processing for pump equipment, store refurbs and POS systems etc, and utilize it as a surety of getting PAID by the Merchant.

    Merchant services is a very complicated business. Many banks are making tons of money, and in my estimation, the banks have ALWAYS been the bad guy in the process. However, The world is headed towards full electronic commerce, and learning to navigate the waters is not that hard to do. Add your costs of processing to your product cost. The consumer typically ends up paying for it anyway…one way or another…and for most, a small charge for the convenience offered is not an issue.

    If Durban passes…get ready for some major changes across the board…and they won’t be good…the consumer will see the brunt of the damage in additional and new banking fees, restrictions in purchase options, etc…and the merchant will have to adapt to loss of sales, and new hassles and costs dealing with the new ‘currencies’ and methods of payment.

    Erick is dead on with this !!

  • jrg50

    I’ve been in the merchant services business for 20 years. I’m always amazed at the merchant who is not aware that there is No free lunch….and that definitely applies to the costs of handling money. The first thing I always advise a merchant to do is factor his money handling costs into the cost of goods sold.

    Secondly educate yourself about interchange pricing (the bank to bank fees on the backside of each transaction) and the processing fees charged by the providers who bring you the service.

    Next, consider the purchasing trends and preferences of the consumer…and if you don’t like the fees being charged….drop the cards as a payment option and watch what that does to your business. Debit cards are the most preferred means of payment in America, and it continues to grow year to year. Why? Convenience….and brainwashing. People prefer to use Debit over cash, checks and with the credit crunch and eco-situation… credit. Understand that your costs of processing Debit vary between “checking cards” swiped fees, keyed entry fees and PIN Debit.

    You impact your cost by offering differing payment methods. Push PIN Debit and watch your costs dorp and your risk virtually vanish. Many Oil Providers (in a C-Store/Gas Station environment) do the processing for the merchant, and in my experience….most merchants have NO clue of what they are actually paying for this “privilege. I’ve personally saved a CStore Merchant more than $60K annually by revamping his system and means of payment processing. (in this case the Oil company was fleecing the guy…and this happens alot.) Many Oil companies swap out the processing for pump equipment, store refurbs and POS systems etc, and utilize it as a surety of getting PAID by the Merchant.

    Merchant services is a very complicated business. Many banks are making tons of money, and in my estimation, the banks have ALWAYS been the bad guy in the process. However, The world is headed towards full electronic commerce, and learning to navigate the waters is not that hard to do. Add your costs of processing to your product cost. The consumer typically ends up paying for it anyway…one way or another…and for most, a small charge for the convenience offered is not an issue.

    If Durban passes…get ready for some major changes across the board…and they won’t be good…the consumer will see the brunt of the damage in additional and new banking fees, restrictions in purchase options, etc…and the merchant will have to adapt to loss of sales, and new hassles and costs dealing with the new ‘currencies’ and methods of payment.

    Erick is dead on with this !!

  • jrg50

    PayPal is a player in the payments market who is developing alternative payment methods for both the merchant and consumer. Typically card purchases with normal bankcards will have standard (normal) rates along with whatever fees they impose. The Bankcard / Nacha association rules still apply to them….and they are a Provider so they will levy their own fees in addition to whatever fees evolve from Durbin.

    The bottom line for a merchant, is that there is no 100% fool proof means of Capturing money electronically other than a bankcard transaction…and of course there are rules regarding disputes, Merchant and consumer protections.

    There are a great many companies trying to break into alternative payments…especially as the Govt. gets their hands into everything and trys to control it all, while not knowing the actual business. Look for more and more options to come to the market.

  • jrg50

    PayPal is a player in the payments market who is developing alternative payment methods for both the merchant and consumer. Typically card purchases with normal bankcards will have standard (normal) rates along with whatever fees they impose. The Bankcard / Nacha association rules still apply to them….and they are a Provider so they will levy their own fees in addition to whatever fees evolve from Durbin.

    The bottom line for a merchant, is that there is no 100% fool proof means of Capturing money electronically other than a bankcard transaction…and of course there are rules regarding disputes, Merchant and consumer protections.

    There are a great many companies trying to break into alternative payments…especially as the Govt. gets their hands into everything and trys to control it all, while not knowing the actual business. Look for more and more options to come to the market.