The Senate will have its first opportunity to undo – or at least delay – one of the most outrageous elements of the disastrous Dodd-Frank financial takeover legislation soon, perhaps as soon as this week.
In question is whether an amendment attached to the law by Sen. Dick Durbin (D-Ill.) will be allowed to stay in place, resulting in price controls on debit transactions. The Durbin amendment is already causing free checking to disappear and banks to add consumer fees for debit cards, and when it goes final it could devastate small banks and credit unions.
Democrats who believe in big government arbitrarily restructuring markets are expected to act this way, but the 17 Republicans who voted for the amendment were sold a bill of goods. They should now correct their error and support repealing or at least delaying the regulations.
The Durbin amendment was a giveaway to big box retailers who wanted to cut their debit card transaction costs not through negotiations in a free market, or choosing not to accept certain cards, but rather by turning to the federal government to shred their contracts with the payment networks and create a new price control regime. The losers will be the millions of consumers for whom debit cards have been working just fine, and the millions more who enjoy banking services like free checking that are made possible by through debit card transaction revenue.
At the time, the “fact sheet” distributed by Durbin’s office claimed the amendment would not create price controls, saying “Sen. Durbin's amendment would not have the Federal Reserve set interchange prices.”
But here’s what the Fed’s actual proposed rule says on the matter:
“The issuer's allowable costs incurred with respect to each transaction would be… subject to a cap on the amount of any interchange fee an issuer could receive or charge, regardless of the issuer's allowable cost calculation. The Board proposes to set this cap at an initial level of 12 cents per transaction.”
The current average fee, determined by the free market, is about 44 cents. The drastic price control will, as price controls always do, cause shortages and inefficient allocation of resources. In particular, it will spur the elimination of free checking accounts, free debit cards, and debit card rewards programs. It will also result in less investment and less innovation in payment networks, including fraud monitoring and other value-added features that now won’t be invented because of the price control.
Seventeen Republicans fell for it, and voted for the amendment. Fifteen of them are still in the Senate, and they have no excuse now for not recognizing that the amendment is now resulting in a straight-up, 12-cent price control. (They are: Chambliss and Isakson from Georgia, Grassley from Iowa, Crapo and Risch from Idaho, Lugar from Indiana, Vitter from Louisiana, Brown from Massachusetts, Collins and Snowe from Maine, Wicker from Mississippi, Burr from North Carolina, Graham from South Carolina, and Barrasso and Enzi from Wyoming.)
Another Durbin deception came with respect to smaller banks and credit unions, which were supposedly carved out from the new price controls. However, because there is no practical way to actually implement a payment network that charges higher fees only for certain issuers, the smaller banks will actually be hit the hardest. Fed Chairman Ben Bernanke – who is reluctantly moving to implement the price controls – recently said: “It's going to affect revenue of small issuers. And it could result in some smaller banks being less profitable or even failing.”
The last thing our economy needs right now is more bank failures, prompted by a costly and unnecessary new federal regulation.
Fortunately, Democratic Sen. Jon Tester of Montana is leading the bipartisan charge to at least delay the rules for two years, while a study is conducted determining what the likely consequences would be.
Imagine that: finding out what a regulation will do before rushing to implement it. Tester has been building bipartisan support, and if the fifteen Republicans who, perhaps unwittingly, voted to create the price controls can now be persuaded to do the right thing, Tester’s amendment may get the 60 votes it needs to pass.
Congress really should go further and outright repeal not just the Durbin amendment, but the entire disastrous Dodd-Frank law.
Nevertheless, the Tester amendment vote will be Congress’s first chance to revisit one of Dodd-Frank’s most outrageous provisions. If you like your debit card and your free checking account, this is an important vote to watch.
Phil Kerpen is vice president for policy at Americans for Prosperity and the author of the forthcoming book “Democracy Denied” (BenBella Books, October 2011) on President Obama’s regulatory agenda.