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Stage-One Thinking: Debit Card Edition
Yet another example of the unintended consequences of poorly-thought-out regulation has surfaced. Back in 2010, Senator Dick Durbin of Illinois added an amendment to the Dodd-Frank bill that capped the amount a bank could charge a retailer for a debit card transaction.
In The Economist this week, an article describes what has happened as a result of this amendment. Durbin assumed that the rate reduction would be passed on to the consumer. Instead, retailers kept the rate difference, and banks raised their fees on a host of services in order to make up for the lost revenue:
Mr Durbin’s amendment has cost the banks $6.6 billion-8 billion annually, according to a paper by the International Centre for Law and Economics (ICLE), a think-tank. But retailers, whose profits have been sapped by the weak recovery from the financial crisis, seem to have pocketed most of the windfall, just as they did when interchange fees were cut in Australia. (Their shares jumped when the new rules were announced.) Meanwhile the banks, which are in even worse shape, have tried to make up for the lost revenue with higher charges for other things, including monthly fees for having a debit card, or even a current account. In 2009 banks provided 76% of America’s current accounts free of charge; last year the figure was only 38%. The higher charges in turn, have pushed 1m Americans out of the formal financial system—not the result Mr Durbin was aiming for.
Does anyone have a theory as to why progressives seem incapable of understanding that individuals and companies will tend to act in ways that will benefit their own economic interest?
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Published in General
I did not mention the necessity of competition in my comment because I thought it was universally understood here and did not need to be explicitly stated.
As to misunderstanding arguments: I would direct you to two podcasts with Russ Roberts dealing with Michael Pollan’s assertion that retailers intentionally try to dupe their customers. Roberts (who probably has the largest general audience of any current Austrian/Chicago economist) consistently delivers a fairly simple message that competition will always force retailers to act in the immediate interest of their customers.
While I agree with that sentiment in the long term, he phrases it in such a blanket fashion, and so simplistically, that one could easily assume that competition would also force debit card savings to be automatically passed on (and see also my comment above about passing on savings from healthcare to employees). However, as Misthiocracy points out, running a business is so complex that some decisions will always have to be made which, on their surface, go against the interest of the consumer.
This is really an issue about applying our simple (and correct) principles of market economics to the complexity of reality.
I agree. I think it is less a retailer vs. bank fight and more of a Big Bank vs. Small Bank fight. Small community banks were making pretty good profits issuing debit cards tied to their customer’s checking accounts for free then charging a fee to retailers. The Big Banks like Chase and Citi because of their size made a lot more money off their credit cards, and debit cards issued by small banks were digging into their business.
Visa and MasterCard make their money either way. They just issue the cards and process the payments. It would be interesting to see if Visa and MasterCard make more with debit card transactions or credit card transactions.
Complex is right.
So, you’re a retailer and you know that the new limit for debit transaction fees is a boon. You’ll pay out less. Do you want to price more competitively or just attempt to capture the revenue?
Well okay, how much of a break are you receiving?
So you crunch some numbers and you figure that hey, your transactional costs are probably going down by maybe 7/10 of a percent. Awesome!
Certainly there are ways to try to use this to lower prices to target your comp. They’re mostly awkward and complicated, to say the least.
For instance, you could privilege all debit transactions with a discount, but that can (will) cause problems with check/cash payers. You could try to find a “debit purchase likely” pricing sweet-spot on items, but if you routinely garner multiple purchases per transaction that approach will be muddled.
You could, of course, just drop prices across the board by 7/10 of a percent, but then you’d likely be revealing that you are a moron. If you are Wal Mart facing Target, that type of approach could make sense. If you are a typical small time retailer… pitching a product that was $14.95 but has now been reduced to $14.82 is basically bad business.
Interesting. Up here in the Great White North, the debit network is operated by a not-for-profit association (called Interac) owned jointly by the banks (all of them “big”, as Canada has no such thing as “community banks”), rather than the credit card companies. As I understand it, private companies (who are all members of Interac) compete against each other to provide debit machines to retailers, with each one setting its own transaction fees.