Six months ago, the Federal Reserve implemented price controls on debit card swipe fees under the Durbin Amendment, one of the many deeply misguided provisions of Dodd-Frank.
Last summer the U.S. Senate had an opportunity to turn off these price controls, but they failed to do so. With twelve Senate Republicans betraying the free market, the effort failed by six votes.
Proponents of the price controls insisted that the lower transaction fees would be passed on to customers in lower prices at the register, but six months of experience have shown that this experiment in regulatory intrusion has been all pain and no gain for consumers.
As predicted, banks who could no longer earn a market return on debit transactions shifted to charging fees for consumer debit cards, until vilification by politicians and the media forced them to drop the fees.
Then they shifted to more subtle fees, with most banks greatly restricting the availability of free checking accounts with higher minimum balances.
Popular rewards programs are disappearing.
As always, price controls shifted costs and caused market distortions and dislocations.
Meanwhile, the purported savings at the register simply haven’t materialized. Instead, the big-box retailers who pushed these self-serving regulations are pocketing their savings from the price-fixed swipe fees.
The new website Where’s My Debit Discount? from the Electronic Payments Coalition shows that two thirds of stores actually raised prices after the regulations took effect. Home Depot, a lobbying powerhouse that delivered the votes of both of its home-state Georgia U.S. senators Johnny Isakson and Saxby Chambliss, (Republicans who frequently profess support for the free market), has announced a $35 million annual boost to its bottom line thanks to the price controls.
The website also features a poll from Ipsos Public Affairs that found that just seven percent of Americans believe retailers are passing on their gains from the price-fixed swipe fees to consumers.
Ironically, the new Federal Reserve rule has resulted in higher fees for many of the merchants who can least afford it – mom and pop stores that don’t sell as many big-ticket items as the big-box stores. When the free-market determined fees, the average was around one percent of the transaction total. Under the new regulation, there is a price cap of 21 cents plus a penny for fraud, plus .05% of the transaction.
While proponents of regulation have stressed that more expensive transaction fees were chopped down by the new cap, they ignored that payment networks would naturally respond by raising fees on smaller transactions up to the cap to maximize the revenues they are allowed in the newly-regulated market. A recent report from an industry analyst found that’s exactly what happened – with fees actually going up for merchants with low-dollar transactions.
Vending machines used to pay fees as low as 5 to 7 cents. Now they pay 22 cents. “Overnight, the variable costs of a transaction have tripled," Jim English, a vending-machine operator, told the Wall Street Journal. Redbox raised its movie-rental fee 20 percent from to cover the cost of higher debit fees.
So now a store selling a $2 cup of coffee or a $1 movie rental and a store selling a $2,000 3D television are paying the same government-mandated fee. It’s easy to see who the winner is and who the loser is. Many small businesses are being hit from both sides, paying more for many small debit transactions they process and also paying more for banking services as fees proliferate.
The whole sordid episode is a classic example of what happens when companies decide to engage in cronyism instead of capitalism.
The big-box retailers banded together and forced through price-controls that have boosted their bottom lines while wreaking havoc on consumers, small businesses, and millions of Americans who used to enjoy free checking.
Government intervention can certainly reward the politically connected – but only at the expense of the rest of us.
Phil Kerpen is the author of “Democracy Denied: How Obama is Ignoring You and Bypassing Congress to Radically Transform America - and How to Stop Him.”