Imagine that McDonald’s persuaded Congress to pass a law allowing the federal government to set the price that farmers charge fast-food restaurants for potatoes.
Imagine further that Congress specified that the government-set potato price be based only on the cost of transporting potatoes to McDonald’s. The cost of land, farm equipment, fertilizer, insecticide and workers would not be included.
Anyone with rudimentary economic knowledge could guess that this system wouldn’t work. Most farmers would no longer earn a profit on potatoes, so they’d stop growing them. Potato shortages would cause an uproar among French fry lovers, and Congress eventually would overturn the government price control — but only after driving many potato farmers out of business, especially the smaller ones.
Here’s the kicker – potatoes would end up costing more, not less, because the supply of potatoes would decline. McDonald’s and other restaurants might benefit in the short run, but probably not in the long run. And farmers and French fry lovers would undoubtedly be hurt.
Unless Congress removes a special interest provision from the banking bill, this scenario
could unfold for one of the most critical financial tools in the country: debit cards – the payment cards that allow shoppers to make purchases directly from their bank accounts as a safer, more convenient substitute for cash. Just replace "debit cards" for "potatoes," "banks and credit unions" for "farmers," and "Wal-Mart" for "McDonald’s;" you’ll get the picture.
This Wal-Mart-sponsored provision – inserted in the bill without a single public hearing – would benefit the mega-retailers but badly harm America’s smallest community banks and credit unions, as well as consumers.
Passed after heavy pressure from retail industry lobbyists, the provision, called the
Durbin amendment, would allow the Federal Reserve Board to establish price controls on debit-card "interchange" fees – the transaction fees paid by retailers to card-issuing banks and credit unions for the use of debit cards.
The price-control language reads like a copy-and-paste job from the retailers’ wish list.
It limits the interchange fee to the cost of the electronic transmission of the digital files, dismissing out of hand the other expenses banks and credit unions incur to provide the convenience and security of debit cards; including the vast central nervous system needed to provide instant debit transactions across the globe safely and securely – and, notably, fraud expenses.
If this amendment becomes law, most banks and credit unions will no longer have an economic incentive to provide retailers and shoppers the convenience of debit cards.
Many will stop issuing cards. Others will charge customers higher card fees.
How this could possibly help consumers is a puzzle.
Wal-Mart’s victory would likely mean not just less debit card availability and higher fees, but fewer or no "points" rewards, which are paid from interchange revenue. And had the Senate conducted a hearing, they might have read the nonpartisan Government Accountability Office’s recent finding of zero benefit to consumers from Australia’s imposition of interchange price controls in 2003. The retailers simply pocketed their gains from the lower interchange fee.
Seniors, unemployed workers and low-income families also could lose the option of receiving government benefits on a prepaid debit card, increasingly the method of choice for federal and state benefit payments because cards are safer, more convenient and less costly than paper checks.
Tragically, the nation’s 200-plus minority- and women-owned banks could be hardest-hit if this amendment becomes law. These banks, mostly focused on underserved communities – those most in need of capital and credit right now – are critical links to an economic recovery in the job market. But due in part to our historic commitment to lower-deposit customers and hands-on customer service, we have higher costs per transaction than most of our peers, making us the most likely debit-card issuers to drop out of the market.
The Wal-Mart provision’s defenders retort that their special-interest proposal exempts smaller credit institutions. But the argument is sophistry, because any federal price rule on debit cards will surely set the market rates with which small and minority banks will have to oblige. If small and minority banks are the only ones able to recover their real costs, and if larger banks are forced to operate at below cost, then eventually the small and minority banks will be forced into a Hobson’s choice – operate at a loss or leave the business altogether.
As smaller institutions lose market share or drop out of the debit-card business, their depositors could flock to bigger banks who offer the service. That would be ironic: a Democratic Congress endangering minority- and women-owned banks while consumers are forced to subsidize huge retailers.
Michael A. Grant, J.D. is president of the National Bankers Association
