Retailers Don't Need Another Regulatory Handout

Hidden consequences of banking regulation hurt poor people the most.



Benjamin Franklin said there are only two things certain in life: death and taxes. But I'd like to add a third: cronies coming back for more after Washington gives them a handout. Case in point, the merchants and retailers who got a juicy morsel from Dodd-Frank are now clamoring for more.

Sen. Dick Durbin, (D-Illinois), slipped into the monstrous 2010 Dodd-Frank financial regulation bill a favor long sought by big-box retailers, such as Wal-Mart. The Durbin amendment, as it is known, imposed price controls on interchange fees for debit cards. Interchange fees are what banks and card issuers charge retailers for processing payments. Many consumers prefer to use cards instead of cash, so it's advantageous for retailers to provide that as an option.

While retailers are all too happy to reap the benefits—which include cutting labor and security costs and retaining customers by accepting card payments—they don't much like paying the market price to do so, hence the intense lobbying to secure a Durbin amendment-type provision.

The price controls in the Durbin amendment only apply to debit cards. However, as George Mason University professor Todd Zywicki predicted in 2011, the unintended consequences of the regulation have cut enough into the financial windfall expected by retailers that they now want price controls for credit cards, too.

That would be crazy. Enough evidence has accumulated in the years since Dodd-Frank to give regulators pause. For instance, multiple studies have identified negative and unintended consequences from the Durbin amendment's price controls for debit card interchange fees. A large survey of merchants conducted by the Federal Reserve Bank of Richmond found that few have lowered consumers' prices despite a substantial reduction in their payments to debit card issuers.

At the same time merchants have reaped a windfall, customers have found that banks are quick to make up the losses elsewhere. Benefits such as rewards programs have been cut or eliminated, while numerous fees have been increased—including account maintenance charges, insufficient-funds fees and inactivity fees, to name a few—yielding a net negative for consumers. One estimate puts the total net loss to consumers between $22 billion and $25 billion.

This shouldn't come as a surprise. Government interventions rarely benefit the public at large. Usually, they just help the special interests that pushed for them. Unfortunately, Congress is more apt to respond to pressure from special interests than it is to watch out for our general welfare. Moreover, earlier this year, Europe imposed a cap on interchange fees for credit cards, as well as debit cards, making very similar arguments for consumer savings as those used to back the Durbin amendment. The move energized the call on this side of the Atlantic to do the same.

The Durbin amendment was slipped into a major regulatory bill by a Democratic majority in Congress. To be fair, some Republicans supported the rules, too. The question, then, is whether the current Republican-controlled Congress knows better today and will deny out of principle the calls for additional handouts for retailers. Unfortunately, its record on cronyism has been mixed at best.

Nevertheless, members of Congress have considerable evidence in front of them demonstrating the costly folly of setting price controls on payment processing—which they should heed, not only to justify rejecting calls for greater intervention but also as cause for undoing past mistakes.