The Board of Governors of the Federal Reserve Bank has decided once again to hand gifts to a select group of businesses that includes the world’s wealthiest corporations. And once again, average Americans are going to be footing the bill.
If the proposal goes through, even if they are not paying vastly inflated prices for the goods they buy due to quantitative easing, American consumers will be losing their free checking, seeing the return of annual fees, and getting significantly reduced reward points for the purchases they make with plastic.
The gift the Fed voted to give on December 16 wasn’t free money through more quantitative easing – or whatever new name they have come up with to make inflation sound nice. Rather, under the direction of an amendment to the Dodd-Frank financial “reform” law by Senate Majority Whip Dick Durbin (D-Ill.), the Fed proposed bestowing near-free access to the services of the vast electronic debit card payment system for some of the nation’s wealthiest retailers – with the tab to be paid for by community banks, credit unions and, of course, the American consumer.
Wal-Mart, Walgreens, Home Depot and the other retailers who lobbied for this corporate welfare benefit greatly from consumers using cards, both in increased sales and in protection from the costs of fraud from bad checks and theft of cash, yet they have gone charging to Washington for a regulatory “free lunch” to allow them to shift the costs of these valuable services to consumers.
Profits and Price Controls
In one of those rare moments of politicians acknowledging the true masters whom they serve, Durbin admitted on the Senate floor that the CEO of Walgreens, headquartered outside of Chicago in his home state, called him to complain that the transaction fees Walgreens pays to process debit and credit cards were “the fourth-largest item of cost for their business.” Durbin actually argued that relieving costs of doing business for a company that makes $2 billion in annual profits was a reason for support for price controls on what they pay for financial services.
But the Fed even exceeded Durbin’s order.
Under the proposed rule the Fed put forward for regulation of interchange fees – the fees card issuers charge retailers to process debit card transactions – merchants will never pay more than 12 cents for any customer’s transactions, whether it’s for $1.00 or $10,000.
90 Percent Revenue Drop
According to the Associated Press, the Fed said average interchange fees in 2009 ranged from 44 to 56 cents. This means the 12-cent cap will cause a 70 to 90 percent drop in revenues for the banks and credit unions that issue debit cards. And by the Fed’s own admission, this will not come close covering the cost of processing debit card transactions, let alone allow the banks and credit unions to make a profit from what they charge retailers for the valuable services of electronic payments.
The rule states that card issuers will only be able to recover what the Fed deems to be “allowable costs.” Among the costs that are not “allowable,” according to the Fed, are fixed costs of computers and software, the cost of distributing debit cards, and employee costs for “responding to certain customer service inquiries.” Banks and credit unions can charge merchants a small fee hike for the cost to combat debit card fraud, but only under the strictest of conditions.
According to Professor Richard Epstein, a constitutional law and property rights expert on the faculty of the University of Chicago Law School, this rule is the first price control scheme in U.S. history in which businesses, by design, were required to price below a product’s cost. He says in an interview that even under the gasoline price caps of the ’70s, “no one was asked to sell below cost.”
Dubious Constitutionality
And this is not only horrible policy; it also likely crosses a constitutional line. As argued by a lawsuit challenging the Durbin Amendment from Minneapolis’ TCF National Bank, on which Epstein is serving as an attorney, the fee controls likely violate both the Due Process and Takings Clauses of the 5th Amendment because they deprive banks and credit unions that issue cards of their property rights to a return on capital invested. The Supreme Court in its 1989 case Duquense Light Co v. Barasch, affirmed that a government-set “rate is too low if it is so unjust as to destroy the value of the property for all the purposes for which it was acquired.”
But according to the Fed, the 12-cent cap creates “an incentive to control costs.” And besides, the Fed points out, “the interchange fee standard would not limit the ability of an issuer to earn revenue from other sources, such as by charging fees to its cardholders.”
Consumer Impact
And indeed, consumers have already been paying for the anticipated costs of the Durbin Amendment. “Free checking as we know it is ending,” reported the lead paragraph of an Associated Press story in October, and the article listed one of the main reasons as “the new regulations limit fees the bank can collect when retailers accept debit cards.”
The Fed is taking comments on the rule through Feb. 22, and you can send them your thoughts at [email protected].
John Berlau ([email protected]) is director of the Center for Investors and Entrepreneurs at the Competitive Enterprise Institute. Excerpted with permission from an article originally published at Big Government.
John Berlau is a senior fellow at the Competitive Enterprise Institute and a policy advisor to The Heartland Institute.
