More on Interchange Fees

Apologies for the absence--I was wrestling with a column yesterday.  Luckily, this seems to have given you lots of time to comment on earlier threads, particularly the one on interchange fees.

That gives me a lot to respond to.  Let me see if I can hit the main points on interchange: 

1.  Debit cards are regressive; merchants charge slightly higher prices, which hurts people who pay cash.  True, but trivial; you need a fairly elastic definition of the word "hurts" to care about this.  We're talking about a transfer of, at most, tens of dollars a year.  There are lots of such transfers in the retail community: those who buy small amounts cost more than those who buy lots; those who park cost more than those who walk; those who use coupons and hunt for sales cost more than time sensitive shoppers who buy whatever they happen to want.  As I asked before the amendment passed last year: shall we also outlaw Costco because the urban poor do not have SUVs, spacious pantries, and large chest freezers in which they can store their warehouse club bounty?

You do not slap a price control on an otherwise functioning market because the poor might pay, over the space of a year, $20 more for food.  If this is a real problem, you increase the damn EITC.  (As maybe we should anyway).

Moreover, this was a bit rich coming, as it usually did, from the retail lobby.  I find it hard to believe that merchants were spending millions of dollars lobbying because they wanted so badly to pass their interchange savings onto the deserving poor.  I rather suspect they were hoping to pass the interchange savings onto their bank accounts.

There's evidence for this, by the way: according to the GAO, when Australia slapped price controls on their interchanges, there's no evidence that prices went down.  Of course, you can handwave and say that well, maybe there was a lot of other stuff going on and we couldn't detect the effect, but here's the problem with that:  if we couldn't detect it, that means that the effect was very small. And we should probably shy away from enacting regulations to achieve ends that are undetectably small.  

To add insult to injury, switching from interchange fees to higher bank account and debit card fees is hardly a progressive change.  People with comfortable balances and good credit will either get free checking, or they'll use credit cards.  Lower balance users with worse credit (read: poorer people) will pay the fees.

2.  You're asking merchants to subsidize your free checking and air miles.  Talking about who subsidizes who is pretty much meaningless in a two-sided market, which is what credit cards are: they need to attract both consumers and merchants.  Do magazine subscribers subsidize corporate advertising, or do advertisers subsidize magazine reading?

What pisses off merchants is that they also need to attract consumers, which means they have to accept credit cards, which means that the fees for supporting the payment system come mostly out of their pockets.  I probably wouldn't like it much either, but the fact that Harris Teeter and Wal-Mart have to pay for the fixed costs of operating a payment system, rathe than Ma and Pa Middle Class, does not strike me as some sort of cosmic injustice in urgent need of federal remedy.

3.  The new system is more transparent.  This is, to me, a frankly bizarre argument.  A cap on debit interchange fees is a price control, not a transparency initiative.  There is a reason that very few transparency advocates focus their energy on slapping price controls on everything in sight.

I mean, sure, if you set the price of bread at the wholesale cost of a loaf of bread, stores would carry a lot less bread, which would certainly show people how little interest stores have in selling products at a loss.  And there would probably be lines for bread, which would certainly be very intrusive and obvious to everyone, rather than the "hidden subsidies" for store lighting and shareholder dividend payments that used to be folded into the price of bread.  And if you did this for all the goods in the store, then you'd probably have to pay a fairly hefty admission fee to get in the store, or a fat fee for parking, or something that would cover all the fixed costs of operating the store and attracting customers and so on.  This would certainly make it clearer to customers how much it costs to operate a store.

But this would not be a blow for transparency; it would be a gross market distortion.

To apply this to a two sided market: if you fixed the cost of advertising at slightly above the physical cost of printing an extra page, magazines would lose a lot of revenue.  And obviously, they would have to make the costs up somewhere, presumably by raising subscription fees.  But this wouldn't be "more transparent" in any interesting sense, even though yes, it would make many customers much more aware of the costs of running a magazine.  It would just be an elaborate way to put most magazines out of business.

4.  It's only disgusting big banks who don't care about their customers who are slapping on these added fees; smaller banks and credit unions didn't do it, so the fees must just be a cynical ploy by greedy bankers, rather than an actual effect of the Durbin amendment.

Ahem.  The reason that credit unions and small banks are not slapping higher fees on their account holders is not that they are kinder, more considerate folks who only have the best interests of their customers at heart.  Rather, they were exempted from the caps on interchange fees.

Note that I am not trying to argue that large banks are not greedy.  Indeed, I assume they are, just like small banks, medium-sized banks, and people who comment on my blog about interchange rules.  But I tend to assume that my bank is greedy all the time, not just when Dick Durbin is running around capping their interchange fees.  So why did they wait until the cap before imposing the new bank account charges?

Moreover, if all of us did as some of my readers have urged, and switched our custom to smaller banks, this would entirely undo the alleged point of the Durbin amendment, was to lower the interchange fees that retailers are paying.

5.  Retail is more competitive than banking, so more of the fees will get passed through.  Argument by assertion.  Neither commercial banks nor retail operations compete entirely on price, but my understanding is that retail banking in the US is pretty competitive.

Moreover, well over half of the fees supposedly go to cover either rewards, or the transaction costs of bank accounts and payments, according to a report frequently cited by supporters of Durbin, so the merchants would have to be passing through almost all of the savings in order to make this a better deal for customers.  Even if you allow some higher benefit for cash over air miles, I don't think you can allow much, because so many rewards these days are . . . cash back.

How likely is it that they'll be passing through the vast bulk of the gain? Well, remember that merchants have three or four classes of customers: credit, cash, check, and debit.  The fee cap is not going to deliver a huge savings on every transaction; just substantial discount on a fraction of them (and not even that, if the lower interchange fees push people onto credit cards, or into credit union accounts where the fees aren't capped).  

I expect that this fragmenting of payments is going to significantly reduce the competitive pressure to distribute the gains to consumers, since we're talking about something less than a penny off for every dollar in the price of a product.  Most debit card purchases are not $800.00 flat-screens; they're gallons of gas and cartons of milk. Maybe gas stations will feel compelled to give you that half a cent per gallon; it's one of the most competitive commodities on the market.  But for things like groceries and drugstore items, I'm skeptical.