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Durbin Doomsday Never Came

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Every now and then some doomsday cultist predicts the end of the world, but it doesn't occur. No big news.

Same in banking. The first-ever restriction on card interchange — a 50% cut for debit cards — was predicted by banking cultists to have cataclysmic consequences. It would put community banks out of business. Enrage millions of consumers who would be deprived of cherished "free" checking. Slash debit card activity. Remember the choral yelling and finger pointing?

None of the above happened.

It's not for me to say lobbyists and bankers, including some noted CEOs, didn't earn their pay. They (and the voters in 2010) convinced the Fed to roughly double the reduced debit interchange mandated by Congress, and pull half the teeth from the routing rule aimed at forcing down interchange by increasing competition. Craven.

But the "Durbin Accident" didn't happen. Life goes on nearly unchanged. Just more embarrassments for Brian Moynihan, with his stillborn $5 per-month debit card fee and his more recent dance on the checking fee griddle. But there will be larger and quite different consequences.

For at least 25 years, I could tell everyone who asked me that interchange would continue to be high and increasing — even after the banks got their money out of Visa and MasterCard while retaining control. The Justice Department has conducted antitrust investigations since I was in knee pants — ineffectually. But if I kept repeating that rates can't be forced down, eventually I'll be proven wrong. Maybe soon.

The U.S. has the highest credit interchange rates among 13 issuing countries, with double to triple the rates of some other respectable venues. I'll explain why.

But first, what's this? Isn't interchange some intricately technical, backroom phenomenon? No. Economically, it's like a hidden sales tax — sand in the gears. It makes almost everything you buy more expensive. Fumiko Hayashi of the Federal Reserve Bank of Kansas City found that almost half of this interchange goes into cardholder rewards.

That's more regressive than an ordinary sales tax because the benefit goes disproportionately to a limited group of heavy spenders, big recipients of credit card rewards. Maybe not the fabled "1%," but let's say 10%. They're some of the same people who benefit from "0% APR for 15 months" on high credit lines, also fuelled by interchange. Glaring proof that interchange rates are enormously too high, far more than compensatory. Once all that is more widely understood, credit card interchange in the spotlight will heat and melt.

Interchange benefits banks at the expense of consumers, including those who never could get a credit card, since merchants charge the same price no matter how you pay. It also has furnished much of the blood on which Visa and MasterCard feed. The retail industry suffers somewhat from the resulting higher prices, but much less than most consumers suffer and banks benefit.

Before acceptance of cards by retailers became nearly universal, Visa and Master Card restrained interchange increases and negotiated special deals. The special deals and intricate rate structures still proliferate. But now that acceptance is nearly universal, merchants cannot individually resist. What is most unjust is that they must accept a card without even knowing what it will cost.

In an imaginary scenario where U.S. retailers were organized and cohesive, you would see something different. The retailers would announce, for instance, "Next Saturday, we'll accept no MasterCard cards." They'd hammer one of the card brands as the UAW used to hammer a targeted automaker. All the rates would drop, for that brand and the others. That won't happen.

But credit card interchange, like debit interchange, is fixable in Washington.

One reason why the U.S. has among the highest interchange rates on earth is that our financial industry is much more concentrated, organized and politically influential than our retailers. That's not true everywhere. Francois Hollande, the likely next president of France, is quoted often in Le Monde referring to the financial industry as the common enemy. The most likely next president of the U.S., who is the current president, is a bit more discrete for now — but not much.

Durbin was a non-event, just as the first-ever "government price-fixing" for credit cards (late fees), in 2010, was a non-event. If reducing credit card interchange by 1%, roughly half, will wipe out free rewards, then it will cost banks nearly nothing. Definitely non-fatal.

To get airline cards with rewards, you have to pay big fees. That's what's coming for other reward cards. And if you're in the card marketing business, consider a different career.

Andrew Kahr is a principal in Credit Builders LLC, a financial product development company, and was the founding chief executive of First Deposit, later known as Providian.

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Comments (4)
Combined with overdraft reforms, Durbin was the death blow to free checking at TBTF banks and at most regionals. The banks impacted by Durbin have half of the bank branches and around 60% of checking accounts. Retailers saw the political winds blowing in their favor and they seized the moment to shift profit from banks to themselves. The loser, of course, is the consumer. The world didn't come to an end, but this article added nothing to the con
Posted by Jeff Platter | Tuesday, March 06 2012 at 6:07PM ET
Another analogy for the regressiveness of the interchange-rewards loop is the volume discount. It is a cruel fact of poverty that many things are more expensive when you live paycheck to paycheck, but there are more direct ways to address income inequality than toying with the marketing scheme embedded in our payments system, however idiotic it is. Unless there are antitrust issues... Harry Terris, American Banker
Posted by hterris1 | Wednesday, March 07 2012 at 8:53PM ET
Small ticket interchange for some QSR merchants has gone up 50-70%. All are affected, many are hurting and a few have closed. Job losses in the several thousands and impact to the mom and pops that built this industry. Unintended consquences to real people.Not big news to you - telling my kids they can't play football this year?

Pretty big news.
Posted by isiah t | Friday, March 09 2012 at 12:48PM ET
Debit interchange wasn't fixed, at least in the "corrected" sense. The card associations are just adding fees such as Visa's FANF fee, MasterCard's to follow in July. Instead of these going to banks, they're going straight to the associations now. The regulation didn't accomplish anything for normal businesses as the loss in revenue is simply shifting from interchange to another unregulated fee. You can argue that the Walmart's and super retailers won an incredible victory, but normal businesses see negligible reductions in costs and the credit card processing industry is more complex, and thus less transparent, than ever. This regulation is an epic failure and a waste of countless time and money.
Posted by openuris | Friday, March 09 2012 at 12:51PM ET
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