A fight that no member of Congress really wants to revisit has returned to haunt lawmakers even before the Trump administration becomes reality. It’s worth $8 billion per year to the winning industry — banks or retailers — and it involves the debit cards that most Americans carry in their wallets.
As part of the 2010 financial reform law, Congress directed the Federal Reserve to impose rules on the fees that debit card issuers (banks) can charge companies (retailers) that accept their cards for payment. The provision, inserted at the behest of the nation’s retailers, provoked furious protests from banks and card networks such as Visa and MasterCard.
That was a moment when banks, under siege after the 2008 financial crisis, didn’t have the wherewithal to withstand the assault waged by the likes of Walmart, Home Depot and scores of mom-and-pop shops. As 2017 approaches, the moment has a very different feel as Republicans prepare to dismantle the 2010 Dodd-Frank law.
“For the last 6 years, this has been a failed policy,” said Molly Wilkinson, executive director of the Electronic Payments Coalition, a group that represents banks and card networks fighting the Durbin Amendment.
Not surprisingly, retailers see things differently. To them, the Durbin rule began an overdue process of breaking up anti-competitive structures in the payments system so that the mundane task of moving money can gradually become cheaper.
“If Congress moves forward with the repeal effort they should understand they are ending competition in the debit market while embracing higher fees for Main Street business to the benefit of Wells Fargo and other Wall Street banks,” said Austen Jensen, vice-president for government affairs at the Retail Industry Leaders Association, which represents a broad swath of nationwide chains, such as 7-11, Gap and Petsmart.
Hensarling Backs Repeal
Rep. Jeb Hensarling, the chairman of the House Financial Services Committee, is currently revamping his blueprint for replacing Dodd-Frank, dubbed the Choice Act, which passed through his panel but never had a chance at enactment in 2016. After Trump’s election, Hensarling said he’s working on “Choice Act 2.0,” a bill he hopes to see through to a presidential signature.
Since then, retailers and banks have kicked their lobbying up a notch, the latter urging Hensarling to keep Durbin repeal in the bill, the former warning Republicans that rolling it back would trigger a mammoth fight. Hensarling spokesman Jeff Emerson said no decision has been made on the fate of the Durbin Amendment in the new bill.
In any war between monied interests in Washington, the order of battle dictates that dueling studies and data form the vanguard, and this case is no exception.
No one disputes that bank and card networks lost about half the revenue they used to collect — $8 billion per year — from the banks that issue the cards that consumers swipe, or insert, at the ubiquitous point-of-sale terminals. For each transaction, retailers now pay about 24 cents to the banks. These costs are known as interchange fees.
Nor does either side deny that Durbin also opened those terminals to greater competition. Retailers used to have route their transactions through proprietary networks owned by Visa and MasterCard, increasing their dependence on those market leaders. Durbin cracked the pair’s dominance, allowing retailers to employ alternatives, like the Shazam and Pulse networks.
Dueling Studies
There’s not a lot of agreement beyond those basic facts.
The central argument of people like Wilkinson, the lobbyist for banks and card networks, is that the Durbin fee caps created a windfall for retailers that they didn’t pass on to consumers at the end of the day.
“Retailer big box lobbyists made promises to Congress that they’d pass on the savings to consumers,” Wilkinson said.
The retail lobby has counterattacked with a study by Robert J. Shapiro, the chairman of Sonecon, a research firm. Shapiro, who is also an instructor at Georgetown University’s business school, calculated that 45.87 percent of the $8.5 billion that retailers gained from the Durbin Amendment has been passed on to consumers.
“Economic theory and evidence suggest that these savings supported job gains in certain sectors,” Shapiro wrote. “Lower prices for consumers lead to more consumption of goods and services, which drives the employment to produce them.”
Banks and card networks have gone after the Shapiro study with a vengeance, citing the losses on their side.
“Merchants trumpet the study’s estimates as if they were a net benefit to society, when in fact they omit job losses elsewhere in the economy and thus account for only one side of the ledger,” they wrote in an extensive rebuttal.
Federal Reserve Research
A study published by the Federal Reserve Bank of Richmond arrived at much more nuanced conclusions about the impact of Durbin on merchant prices. It points out, based on surveys of merchants, that some prices went up, others fell, and many merchants had a hard time distinguishing the effects of different cost factors.
To some extent, the interpretations of the Durbin Amendment’s impact reflect convictions of how competitive banking and retail markets are in the United States. If you believe that retailing is enough of a price-sensitive business, then merchants who don’t lower prices in response to lower costs will lose market share. Consumers, then, will win.
Though they are a far less powerful lobby than retailers, consumer groups have supported the Durbin amendment.
The effort to repeal the Durbin rule is “a con,” said Ed Mierzwinski, director of the consumer program at U.S.-PIRG, a research group. “The bank lobby and Hensarling are running a con.”
Regardless of the merits, the distaste members of Congress have for revisiting the interchange debate will be central to understanding how the fight unfolds in 2017.
Corker Apologizes
In 2011, the Senate voted on whether to delay implementation of the rule it passed in 2010, an effort led by Sens. Jon Tester, Democrat of Montana and Bob Corker, Republican of Tennessee. Corker famously apologized to other senators for having raised the issue, which subjected them to furious lobbying by both banks and retailers.
“This was a tough fight,” Corker said at the time. “I apologized to my colleagues non-stop for causing them to have to be involved in this.”
Retailers are capitalizing on lingering memories of the last fight over swipe fees.
“The majority of members don’t want to have to choose between their banks and retailers,” Jensen said. “And just becomes it’s coming early in the term doesn’t mean the merchant community will forget about it in 2018.”
As lobbying picked up steam after the election, retailers have also highlighted the danger this fight poses to the rest of the Republican agenda, Jensen said. Republicans have plans for legislation on health care, corporate taxation and many other issues. Why jump into a battle with an uncertain outcome that is sure to alienate at least one powerful constituency?
This political dynamic, it turns out, is the one thing banks and retailers do agree on.
“Members of Congress do not want to choose between friends,” one bank lobbyist said, “and that is the number one reason why they don’t want this fight again.”
