In the battle against Obamacare, the first chinks in the law’s
armor were resolutions against the law by state legislatures. These
resolutions led to court cases that have been victorious in two
instances, and a new majority in the U.S. House Representatives
that voted to repeal the law.
On Tuesday, the first salvo was fired against another
command-and control scheme of the last Congress — from the newly
purple state of Michigan. There, the state Senate, following the
state House last Friday, passed the first
resolution against a provision of the 2400-page Dodd-Frank
financial “reform” of 2010.
In an amazingly unanimous
vote, the Republican and Democrat state senators condemned a
specific amendment from U.S. Senate Majority Whip Dick Durbin
(D-Ill.) and the corresponding
proposed rule from the Federal Reserve implementing a debit
price control scheme that benefits Walgreens, Home Depot, and some
of the nation’s biggest retailers and shifts costs to consumers in
terms of loss of free checking, higher bank fees, and reduced card
rewards.
Referring to “Section 1075,” also known as the Durbin
Amendment, the resolution states: “We urge Congress to stop or
delay the implementation of Section 1075 so that statutory changes
can be made… to ensure Section 1075 does not result in increased
fees on consumers.” The resolution also expressed
concern that the Durbin Amendment would harm credit unions and
community banks, which were given technical exemptions that turned
out to hardly shield them from the law’s costs.
This may not yet be Waterloo for the Durbin Amendment, let
alone Dodd-Frank, but it will certainly add to the increasing
scrutiny — scrutiny that will be under way today at a hearing of
the House Financial Services Committee. It’s also difficult to
imagine a more stinging defeat for a Senate Majority Whip than to
have all the members of his own party in the legislative chamber of
a state in close proximity to the one he represents vote to condemn
his amendment and one of his pet causes.
But then in pushing these price controls on behalf of
retailers, Durbin has been quite arrogant, even for a politician.
In one of those rare moments of politicians acknowledging the true
masters whom they serve, Sen. 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 to support price
controls on what it pays for financial services.
But when the Fed issued its rule in December, it even
exceeded Durbin’s order, filling the Christmas wish lists of
Walgreens and other merchants while giving their customers several
lumps of coal. If the Durbin Amendment isn’t repealed or delayed
soon, 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.
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 as one of the main
reasons “the new regulations limit fees the bank can collect when
retailers accept debit cards.”
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. This goes far beyond even the language of the
pro-retailer Durbin Amendment, which required the Fed to “establish
standards” to assess whether interchange fees were “reasonable and
proportional to the cost,” but did not specify what these fees
should be.
According to the
Associated Press, the Fed said that average interchange fees in
2009 ranged from 44 to 56 cents. This means that 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 to 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.
Retailers claim such severe price controls are necessary
because the Visa and MasterCard networks dominate in payment cards
(which are actually issued by thousands of banks within the
networks). But the structure has mostly survived antitrust
challenges, and as with retail itself, which is dominated by big
players like Walgreens and Home Depot, there are options to choose
from. There are alternative payment systems such as PayPal, and the
Fed rule itself notes that there are a “number of” national debit
card payment networks.
And stores always have the option of only taking cash or
providing discounts for cash. If stores take a debit or credit
card, they are making a business decision that they will earn more
money with it than without it as well as get protection from the
costs of fraud from bad checks and from theft of cash in the
register.
Even in the case of “natural monopolies” like utilities,
it is unwise and likely unconstitutional public policy to outlaw
profit, let alone to force pricing below cost. According to
Professor Richard Epstein, a constitutional law and property rights
expert on the faculty of the New York University Law School, this
rule is the federal first price control scheme in U.S. history in
which businesses, by design, are required to sell their products or
services below cost. He says in an interview that even under the
gasoline price caps of the '70s, “no one was asked to sell below
cost.”
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-based 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 ,
affirmed 8-1 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.” Gee, what a pro-consumer Fed!
The big retailers claim that if they pay less in fees,
they’ll pass on the savings to consumers. But if Australia’s
experience in capping interchange fees for credit cards in 2003 is
any guide, this just ain’t so.
George Mason University law professor Todd Zywicki
noted in the Wall Street Journal, “Annual fees
increased an average of 22% on standard credit cards and annual
fees for rewards cards increased by 47%-77%. Card issuers also
reduced the generosity of their reward programs by 23%.” But Aussie
consumers experienced no corresponding decline in retail prices. A
study by the Government Accountability Office of the U.S. Congress
found no “conclusive evidence” that any of the Aussie retailers’
$1.1 billion in savings had been passed on to consumers.
The good news is there are efforts underway in Congress to
delay or repeal the Durbin Amendment, and at the national level as
well as in Michigan, even some Democrat Dodd-Frank supporters have
pulled back, correctly perceiving that this measure and the Fed
rule implementing it make a mockery of their claim that Dodd-Frank
was a victory for consumers over special interests. Even former
House Financial Services Committee Chairman Barney Frank (D-Mass.)
criticized the Fed on
CNBC for setting the fees “too low” and said he’ll work with the
GOP to change the rule, but was short on specifics.
Meanwhile, watchdogs like the Tea Party movement also need
to watch over the GOP on this issue, including some in Congress
they may normally count as their own. Seventeen Republicans voted
for the Durbin Amendment in the Senate last May, including some
ostensible conservatives who would oppose price controls in most
other contexts. Georgia Sens. Johnny Isakson and Saxby Chambliss
voted aye, for instance, after heavy lobbying from Atlanta-based
Home Depot, a firm that American Banker described
as “on the warpath” against interchange fees. (The full list of
which senators were naughty or nice on their votes on the Durbin
Amendment is
here.)
Conservatives and libertarians are often sympathetic to
retailers and with good reason. They are hit with the taxes and
regulations of Big Government and threatened with coercive measures
from Congress such as union “card check.” Yet when the leaders of
their industry lobby for price controls, we must say in unison, “No
sale!” This is what several groups in the Center-Right Coalition —
from CEI and Americans for Tax Reform to Phyllis Schlafly’s Eagle
Forum — have already done in a
letter last summer asking the Durbin Amendment be dropped from
the pending bill. A new letter sent yesterday by some of these
groups reiterates the call for repeal.
(Note: The Fed is taking comments on the
rule through Feb. 22, and you can send them your thoughts at
regs.comments@federalreserve.gov.
Or go here
and follow the instructions for submitting comments. If you wish to
share your views on whether Congress should repeal the Durbin
Amendment’s price controls, or delay the date the Fed implements
them, you can e-mail your members of Congress or call them through
the general number of (202) 224-3121.
Meanwhile, it wouldn’t hurt to have some Tea Parties in
front of your neighborhood Walgreens and Home Depot communicating
that if they want you to shop in their stores, they’ll have to stop
lobbying to take away your free checking and card
rewards!)
