On Anniversary of Dodd-Frank Price Controls, a Dangerous New Card Game

Previous postings on “Government Bytes” have not been kind to the Wall Street Reform and Consumer Protection Act, a.k.a the Dodd-Frank financial industry law, and for good reason. The law managed to produce the two worst outcomes possible: 1) onerous regulations that have hobbled the banking system and cost consumers, even as they 2) failed to address the role of government-sponsored enterprises such as Fannie Mae and Freddie Mac (now the costly wards of taxpayers). Today is the anniversary of one of Dodd-Frank’s most intrusive provisions, calling for promulgation of price controls on debit-card processing fees. So this is a fitting (though by no means comforting) occasion to conduct a damage assessment of these strictures and highlight an even more worrisome development.

Readers may remember that in February 2011 NTU warned the Federal Reserve, these “interchange” regulations, originally sponsored as an amendment to Dodd-Frank by Senator Dick Durbin (D-IL) carried the potential to: make basic card services costlier to consumers, encourage less economically efficient financial transactions, and perhaps even harm taxpayers as governments pay more for debit card-based operations.

As the Competitive Enterprise Institute’s John Berlau points out, many of those gloomy prognostications show signs of coming true; at the very least, predictions there would be little negative fallout are highly suspect. In an excellent recap of the situation one year after the interchange rules were imposed, he cites information from Bankrate.com showing that the proportion of banks offering free checking dropped from 79 percent the year before Dodd-Frank to just 39 percent this year. Bankrate actually noted that one reason behind the drop was “new rules capping the cost of debit card swipe fees for U.S. retailers.”

Furthermore, according to the Electronic Payments Coalition, consumers are paying 1.5 percent more for retail goods this year, undercutting claims that the interchange price controls would keep prices steady or even drive them down. Berlau’s conclusion: “While an economic study holding factors such as inflation constant is needed to truly judge whether Durbin has brought any savings to consumers, the burden is on the retailers reaping the windfall to prove consumer benefits, and they have failed to do this so far.”

Berlau also raised an underreported point about the Durbin Amendment’s impact on small and medium institutions, contending in a study he conducted with Georgia Public Policy Foundation that some regional banks may have lost roughly one-third of their net income because of the rules.

A recent examination from the Government Accountability Office often took a wait-and-see attitude on the impact of Dodd-Frank in general on smaller institutions, but did point out that “concerns remain about the potential for their interchange fees or fee income to decline over the long term.”

Not content with having their way over debit cards, now some larger retailers and their trade groups are pushing Congress to do the same thing to credit cards. Their complaints, aired late last month are especially strange, given the far-reaching legal settlement over credit-card processing fees unveiled in mid-July between merchants on one side and Visa and MasterCard on the other. When the privately-negotiated deal (which still needs a judge’s approval) was announced, NTU’s message to lawmakers was loud and clear: “Hands off!” As NTU President Duane Parde quipped at the time, “If Members of Congress truly want to have a constructive role in future financial industry policy, they ought to focus on repealing onerous regulations they have triggered. At the very least, however, they shouldn’t be second-guessing the legal process at such a delicate stage.”

Apparently some of the retailers are a little hard of hearing, even though the voices of many merchants were well-represented in the court proceedings mentioned above. They already stand to make $7.2 billion from the agreement, as well as win bargaining leverage over future swipe fees. Alas, this wouldn’t be the first time in the history of corporate America that one or several companies would rather call in the government to engineer a lopsided outcome, rather than trust the judicial system or the competitive forces of the private sector.  

For their part, the banks aren’t keeping silent over this attempt to chip away at a good-faith settlement that ought to keep Congress from meddling further in this area. A September 20 letter to House and Senate leaders from the American Bankers Association stated:

"We do not believe it is in the interest of policymakers or the consumers they represent to repeat the mistakes of the past by expanding price controls to more aspects of our economy. Policymakers from both ends of the political spectrum have expressed their support for the settlement as the appropriate means to resolve this dispute. We strongly agree. Moreover, many in Congress have asked the industries to sit down and resolve this matter on our own. We have."

No one reading this post has to love banks or hate big box retailers to appreciate the wisdom of this stance. Allowing Congress to make an even bigger mess out of interchange is inviting more trouble for our economy. By moving on from this settlement issue, lawmakers will, in the process, begin moving toward saner financial industry policy … such as repealing the Durbin Amendment and revisiting the rest of Dodd-Frank for that matter.