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Swipe Fee Cap Distorts the Marketplace

The more things change, the more they stay the same.

The National Association of Convenience Stores’ latest op-ed on debit-card interchange fees is the most recent in the organization’s years-long effort to obtain government-mandated price controls. But such controls would only increase large retailers’ profits.

Consider the facts. The new Richmond Federal Reserve study finds that of the retailers that have experienced interchange reductions, few reduced the prices of their products and passed the savings on to consumers. Clearly, price caps have thus far failed to help customers at the cash register.

Consumers have also paid an additional price as a result of price controls. The Durbin Amendment has made it much more difficult for banks to offer free or low-cost checking accounts. Many banks previously depended on interchange revenue to support these types of accounts, which otherwise lose money for most institutions. When that revenue was cut, it became much more difficult to offer the same account services.

In fact, a George Mason University School of Law study found that since the Durbin Amendment took effect, more than 1 million people, mostly low-income families, have seen those accounts disappear or faced higher costs and new restrictions to using them. This translates into an annual transfer of between $1 billion and $3 billion from low-income households to the large retailers that have benefited from the fee cap, all because of price controls.

The fact is that price controls come with unintended consequences that arbitrarily create winners and losers in the marketplace. The Richmond study points out that sellers of “big-ticket” items saw their interchange costs on those items go down after the rule change, while sellers of small-dollar products saw their costs on those items go up. That’s a direct — and unintended — consequence of the government’s attempts to micromanage marketplace pricing. Market forces react to such arbitrary price controls in unforeseen ways.

Government shouldn't be in the business of dictating pricing on private-sector products and services, plain and simple. And the retail lobby shouldn't be in the business of recommending that the government intervene further. We highly doubt that any retailer would want price controls on the products that line their shelves.

The Durbin Amendment illustrates the negative consequences for consumers when policymakers choose winners and losers and distort the marketplace. Fixing the problem with more price controls is no solution.

Frank Keating, former Republican governor of Oklahoma,
is president and CEO of the American Bankers Association.


(4) Comments



Comments (4)
@countrybanker: I absolutely agree with your comment. Keating's argument springs from econ 101 and textbooks like N. Gregory Mankiw's Principles of Macroeconomics. You have to read just what a competitive market might be to understand just how wrong Keating's argument is. Unfortunately, few people reach that level of understanding, so people like Keating are free to spout nonsense and to lie about important matters like this one. Fortunately for readers of American Banker, you do understand.
Posted by Ed Walker | Monday, September 21 2015 at 12:24PM ET
Mr Flagg: You have absolutely no independence, nor would it appear that you could even begin to see both sides of this matter. You will not convince a single person. This website is called Bank Think. This is not a place for paid monkey to espouse the zoo's position. And be careful about wrapping all banks together. Our bank does not own any of VISA or MasterCard; we did not participate in the duopoly.
Posted by countrybanker | Friday, September 18 2015 at 4:57PM ET
Mr. Keating conveniently ignores the fact that banks have been manipulating the system and price-fixing “swipe fees” for decades, tying the hands of merchants and consumers alike.

His argument simply holds no water.

American Bankers Association itself reported in a 2014 study that almost two-thirds of their customers had free checking accounts.

A closer look at the numbers that the banks themselves report to the Fed shows that they still make a 500-percent profit on debit-card swipe fees. To claim with a straight face that the Durbin Amendment is hurting their revenues is as outrageous as these fees.

Debit reform brought some much needed competition and fairness into the payments market by putting limits on price-fixing by card networks. It is the higher prices resulting from banks’ huge profits on swipe fees that hurt consumers, and especially poor people.

Keating also ignores the central finding of the Richmond Federal Reserve study. It showed that the vast majority of merchants did not save anything or could not tell they did due to the Fed’s failed implementation of the Durbin Amendment. The law had it right, but the Fed didn’t follow the law. Merchants can’t pass on savings they didn’t get. Rather than admit this finding (which Keating would like to avoid because some of his members are still ripping off some unsuspecting merchants on acquiring fees), Keating focused on a part of the study that even the Richmond Fed admitted came from a sample too small to be statistically significant.

It’s time Keating faced facts rather than hiding the truth. Debit reform saved consumers almost $6 billion and supported 37,500 jobs in its first year according to a study by the prominent economist Robert J. Shapiro. The savings could have been better if not for the Fed’s mistakes in its implementation.

Banks shouldn’t be price-fixing swipe fees, plain and simple. Changes to limit that price-fixing help everyone – even if bankers would rather not admit it.

Michael Flagg, Merchants Payments Coalition
Posted by Michael Flagg | Friday, September 18 2015 at 4:06PM ET
Is this guy serious. He is talking about marketplace, free markets and the misallocations of resources via subsidies.?

1.Yes, price control is wrong and bad; never works!
2.Yes, government intervention into the marketplace is bad.
3.Yes , price controls always distort!
4.Yes, there are unintended (but easily calculated)consequences that are a result of price controls

HOWEVER, those four same points are also true of monopolies and oligopolies!

If VISA and MasterCard were not duopolistic there would have most likely not been a government intervention. For instance, if the previous pricing was set by a free and competitive marketplace with numerous competitors, the high ticket retail vendors would already have had a lowering of their interchange fees by a competitive marketplace! The fact is there was not one and there still is not.

There should never have been free checking accounts in the first place. No rational business provides expensive services for free...for a sustainable period. Smart people will always ferret out when a service is being subsidized, find the source of the subsidy; and then offer that product or service that is overly profitable (that it can be used to subsidize failing products) to the same customers at a lower cost, either taking the business away or forcing the original service provider to reduce the pricing. Come on Mr Keating!

So, why were many banks in a position to provide free checking(the subsidy) so long? Simple, the victim of the unfair pricing (retailers and consumers indirectly) could not obtain rational pricing in the monopolistic marketplace. Interchange pricing has never been set in a free competitive marketplace.

Arbitrary winner and losers now? Yep! Arbitrary winners and losers before ? Yep! So, Mr Keating, in his ultimate CRONY CAPITALISTIC wisdom, thinks he knows what's best for America and how to allocate the windfall via the banking system?? He wants to deliver the spoils of lack of competition to low income people via free checking? He, Marx and Lenin are just so brilliant.

I am not doubting the large retailers are keeping the savings and/or that there may not be a free marketplace in retail that would eventually force the pass thru of cost savings to the consumer. But two wrongs do not make a right!

The solution is a free marketplace; as a capitalist and even a libertarian , there is still a need for anti-trust laws to break up monopolies and duopolies in a free enterprise system.

Just the thoughts of a small town country banker!
Posted by countrybanker | Friday, September 18 2015 at 12:46PM ET
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