Congressional leaders this week continue to hammer out differences between House and Senate versions of the financial regulatory bill, with aprovision introduced by Sen. Richard J. Durbin, Illinois Democrat, causing particular heartburn. Members privately express anger at being forced to choose sides between major retailers and the bankers, who are in up arms over "interchange rates" - the fees that make the credit- and debit-card system work. Consumers are left in the crossfire.
Mr. Durbin wants the Federal Reserve to determine how much should be charged for use of the payment network built by Visa, MasterCard and other companies. Supporters of the idea, like Senate Banking, Housing and Urban Affairs Committee Chairman Christopher J. Dodd, Connecticut Democrat, insist that the move will benefit the public. "Right now, consumers get whacked because of how retailers are treated by the credit-card industry, by and large," Mr. Dodd said off the Senate floor Monday night. "There are millions of retailers who pay an awful price every day for the surcharges they are saddled with by the credit-card industry."
Fees vary, but based on industry averages, when a customer buys a $100 item from Wal-Mart using debit, the store keeps roughly $98. The remaining $2 takes care of the costs of processing the transaction and covering losses from fraud. The interchange fee, $1.50, goes to the bank that issued the card, and 50 cents goes to Wal-Mart's bank, which handled the initial transaction.
It's important to note that banks, not credit-card companies, issue cards. Without the fee, banks would have no incentive to offer such cards. That's why representatives from 1,000 credit unions around the country have descended on Congress for an "all-out assault" on Mr. Durbin's amendment. In an interview with The Washington Times, the Credit Union National Association's top lobbyist, John Magill, explained how congressional meddling with the fees would create unintended consequences that would harm credit union members. "We'll have to charge hefty fees on checking accounts or some other service to make up for this loss," Mr. Magill said.
Mr. Durbin maintains that his intent is to cut the "outrageously high" interchange costs. "Visa and MasterCard continue to raise swipe fees, even though processing costs have decreased," a press release from the senator's office claimed. It also insisted that the companies "constantly raise interchange rates," which the same release states are between 1 percent and 2 percent.
Visa Group Executive William M. Sheedy told an editorial board meeting with The Washington Times that the fees have not, in fact, increased - they've always been between 1 percent and 2 percent. Instead, the gross amount collected has increased because consumers increasingly choose electronic payment over cash and check. The retailers are complaining, but overall the system has been successful in bringing them more business.
Mr. Durbin and Mr. Dodd think smaller banks are protected by a provision limiting the price controls to institutions with less than $10 billion in assets. Credit unions and community bankers point out that this would create a two-tiered pricing system that simply won't work in practice. Even if it did, merchants would have an incentive to shun cards issued by the smaller banks because they would carry larger fees than those issued by big banks.
Government by good intention frequently results in such unintended consequences. That's why Congress should not get involved in picking winners and losers in this battle. Banks need incentives to issue cards, and businesses need incentives to accept them. The market, not the Fed, is most able to strike the right balance.
© Copyright 2013 The Washington Times, LLC. Click here for reprint permission.
By Rand Paul
Obama acts as though we no longer have a Constitution