Do small banks deserve to be kept alive with affirmative action set-asides? Should retailers be in the business of subsidizing community banks' uncompetitive debit card operations?
This, and the usual Washington political payola, seems to be the crux of the free pass banks and credit unions with less than $10 billion in assets are now enjoying, thanks to the Durbin amendment to the Dodd-Frank financial reform law. Under the Durbin legislation, small institutions were granted an exemption from having to cap the interchange fees they receive from debit card transactions, as bigger banks must do. (The Fed has proposed setting the cap at 12 cents, but the final ceiling may be higher.)
Not only did the small guys gain the legally enshrined right to charge more, but retailers are henceforth required by federal law to suspend the laws of capitalism — and simple logic. Even as Durbin rightly liberated retailers to use discounts to steer customers to cheaper payment methods (cash over card, debit over credit), the amendment forbade them to differentiate between issuers of the same kind of card. They must accept the small banks' costlier debit cards as if it's their duty to prop up bankers who are unable to compete on a level playing field. In the end we will all get stuck with the tab as merchants pass on the added operating cost to consumers via higher prices.
This hot-button topic came to the forefront anew in an American Banker story Thursday. The piece noted that documents uncovered in a Visa and MasterCard legal settlement indicate the network operators are providing information to retailers that — horror of horrors — informs them of how much it costs them to accept a credit card, and possibly a debit card, from a specific bank issuer.
To be fair, the community banks didn't ask for special treatment in this case. They vehemently opposed Durbin's proposal to cap debit interchange, and they continued to do so even after he tried to appease them with the exemption.
Even so, the de facto set-asides for small institutions that the Durbin exemption represents are but one symptom of the absurdity of turning the banking business into a nanny state overseen by Washington. Such favoritism and misguided do-goodism eventually turned Fannie Mae and Freddie Mac into bloated wards of the state. The debit card work-around is no less a perversion of market forces. In the end, community bankers who rail against crony capitalism in the guise of implicit "too big to fail" subsidies are harder to take seriously when they enjoy similar unfair advantages for themselves.
There's no evidence retailers are actually favoring one card over another on the basis of which bank issued it, or that they would even want to risk the wrath of customers by doing so. But those so inclined should be free to have a go at it.
Neil Weinberg is the editor-in-chief of American Banker.