To comply or to defy

Original Reporting | ByJames Lardner | Banking

Market forces or captive market?

The two sides hold utterly opposing views of the Durbin amendment. Bankers portray it as an effort to substitute “government price controls” for market pricing. “The government shouldn’t be in the business of setting prices, and they especially shouldn’t be in the business of setting prices between two businesses,” Charles Kim, the chief financial officer of Commerce Bank of Missouri told Remapping Debate, echoing the view of many of his industry peers.

Swipe fees have risen or remained flat despite huge increases in transaction volume, said a representative of retailers, and despite trends that have seen “the price of computers and computing power and telephones and everything else keep going down.”

By contrast, retailers and their allies see an attempt to correct a market in which prices are already fixed  by the banks and the card networks. In this view, it is the card networks — acting on bank’s behalf — that decide where within a complex pricing matrix to place each merchant and transaction. 

Despite that alleged pricing control, the banks insist that normal market forces are operating: retailers “have the absolute ability to influence the interchange fee,” Feddis said, pointing out that, for starters, retailers “don’t have to take cards, and many don’t.”

That form of leverage generally “doesn’t pass the laugh test in the modern economy,” J. Craig Shearman, a spokesperson for the National Retailers Federation, responded. Most substantial retailers, he explained, would have trouble staying in business if they adopted a no-card policy.


Signs of duopoly?

Like several of the bank lobbyists interviewed by Remapping Debate, Shearman pointed out that supermarkets, after a long period of resistance to debit and credit cards alike, managed to secure preferential rates, with Visa offering a 35-cent ceiling on swipe fees for supermarket PIN purchases. But while the banks cite that story as evidence of retailers’ power to negotiate, Shearman sees it as a historical anecdote about a bygone era when the banks and card companies were working feverishly to bring more merchants into the system.

Congress, in its legislation, and the Fed, in its planned implementation, have taken an unrealistically narrow view of the costs of debit transactions, bank lobbyists argue.

I’m sure at the time there may have been some give-and-take to get into a range that was acceptable,” he said. “They did the same thing with the restaurant industry. But once they have gotten into that range, that’s it — they set the rates, and you take them or leave them… It’s kind of like — I know this is a little over the top,” he said, “but drug dealers: what do they do? They give the stuff away to young kids and to people who aren’t customers yet, and then they start charging.”

The card networks were “acting as a duopoly…setting rates [averaging between 1.5 and 2 percent of the dollar value of a transaction in recent years] that were non-negotiable and until very recently — and still largely — nontransparent,” Mierzwinski said. The proof of something amiss, he and others on the retailer side argue, can be found in the simple fact that swipe fees have risen or remained flat despite huge increases in transaction volume, and despite trends that have seen “the price of computers and computing power and telephones and everything else keep going down.”

But this is another argument that the banks dismiss. Electronic payment networks don’t benefit from the same economies of scale as “manufacturer of widgets,” Jason Kratovil, a lobbyist for the Independent Community Bankers Association, said in a phone interview. “You could make the argument that if anything, interchange should be significantly higher than it is today,” he said, “because issuers are bearing a dramatically higher amount of risk exposure than they were when debit cards were new and fewer consumers were exposed to them.” On further questioning, Kratovil conceded that more transactions don’t add up to more per-transaction risk. Greater volume, he was saying, means only greater aggregate risk (and presumably greater aggregate benefit, though Kratovil did not mention it).   


Will the banks be unfairly forced to bear too much cost?

Congress, in its legislation, and the Fed, in its planned implementation, have taken an unrealistically narrow view of the costs of debit transactions, bank lobbyists argue. They fault the Fed for not considering the need for a return on investment and for funds to plow back into research and development. That point is echoed by several consumer and civil rights groups that have recently joined in calling for at least a brief period of further study.

Some supporters of the amendment agree that the Fed might be justified in raising the fee cap by a few pennies. The banks, however, have not come forward with any data about actual costs and revenues to support their arguments for either a freeze in implementation or a modification of the draft Fed rule. Remapping Debate was unable to find an industry representative willing to say just how the Fed ought to go about calculating debit-transaction costs.

Bank lobbyists do say that if debit cards fail to generate enough income to cover their costs, banks will have to subsidize them by other means. Feddis, having made that point, added that every bank operation ought to be profitable in its own right as “a matter of general economic theory.”

Most of the objections being raised now are the same ones aired by the banks when the amendment was unexpectedly approved by the Senate last May.

Many things don’t pay for themselves, Balto countered. “I think the banks have an incorrect notion of what the costs are,” he said. “I mean, what we’re talking about is access to the consumer’s own account. We’re not talking about some grandiose benefit that they’re providing; they’re just providing access to the account that the consumer possesses. By having debit cards, that means they’re not writing checks, which are far more expensive than debit cards, and so debit cards result in substantial savings for banks. I don’t think that fact should be lost.”

Remapping Debate asked Feddis about instances in which existing pubic policy arguably calls on banks to do things for reasons other than pure profit: the Community Reinvestment Act, for example, asks them to serve low- and moderate-income neighborhoods. Wouldn’t such services normally be less profitable than bank operations in more well-off areas? Arguing that community development advocates have never demanded that banks engage in unprofitable activities, Feddis went on to dispute the premise of the question. “I don’t know whether branches in low-income areas are more or less profitable,” she said.

In the end, Kratovil, Feddis, and others in the banking camp fall back on the argument that merchants are trying to duck their share of the expense of a system that benefits them in multiple ways. Over the past half-decade, McDonald’s, Burger King, and most of the other giants of fast food have embraced debit and credit cards, the Commerce Bank CFO, Charles Kim, pointed out. “Those restaurants were doing just fine,” Kim said. “They could have continued to do just fine; but they made a choice. They said, ‘We want to pay to install the machines and to allow debit to be accepted in our restaurants.’” They did so, according Kim, because businesses that decide to accept debit and credit cards “find that their average ticket on a food purchase goes up, their lines move faster, and they have less cash-handling” and employee theft.

Lower swipe fees will be a “windfall” for retailers, the banks say. (Visa and MasterCard, despite their huge stake in this battle, have remained largely behind the scenes.)  But why are the banks pushing back so hard? They are battling against the Durbin amendment, Feddis said, for “the same reason" that the merchants are battling for it: there’s a lot of money at stake.

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