“After all, a mere month of swipe fee revenue amounts to more than the total sum a presidential campaign will spend between now and next November.”
The journalists at Huffington Post have tag-teamed written several (very) long pieces that have been crucial in understanding the inside of Washington DC at this point in history. First was The Cash Committee: How Wall Street Wins On The Hill, about the little-covered battle over financial reform in House Committee on Financial Services. Second was Power Struggle: Inside The Battle For The Soul Of The Democratic Party, all about the battle within the Democratic party by progressives to figure out what liberalism means post-2008.
Now there’s a new article out by Zach Carter and Ryan Grim called Swiped: Banks, Merchants And Why Washington Doesn’t Work For You, about the massive but little followed battle over the implementation of interchange reform, something we’ve watched closely at this blog.
For whatever reasons, the real economy never pushed for stronger regulation of an out of control financial system during the Dodd-Frank process. Interchange turned out to be the only place, especially after corporations fought for expansive “end-user” carve-outs in the derivatives language. It’s weird to imagine a financial reform battle where the real economy pushed this hard on coco bonds and transparency in the securitization process.
I recommend you read the whole thing. Here you see big business, places like Target and Home Depot, fighting with big finance, the likes of JP Morgan, with 7-11 owners and community bankers also fighting it out alongside. They are duking it out over an important way money is spent in the economy. There’s some great moments in it, like when the amendment’s sponsor, Senator Dick Durbin, has to lobby lobbyists, instead of the other way around:
With a vigor that would make Tom DeLay proud, Durbin has confronted just about anybody who is taking the other side of his swipe fee issue, including lobbyists, civil rights organizations, editorial boards and public interest groups. Even the NAACP was on the receiving end of his ire, an official there says. An assistant Senate majority leader lobbying interest groups to switch sides may seem backward, but it reflects a Washington reality in which lobbyists, not politicians, frequently wield the real power.
“If you scratch the surface, guess what you’re going to find? They have other causes but they’re also debit card issuers,” Durbin says of the NAACP and many of the other progressive groups siding with the banks. “They have a financial interest in keeping the status quo.”
The NAACP doesn’t have its own debit card, but does have a relationship with Visa and U.S. Bank through its credit card. And its top corporate donors include players on both sides of the debate — Bank of America, Walmart, Wachovia, Best Buy and Target have all given generously in recent years. And like Ellmers, the NAACP has changed its position on swipe fee reform multiple times and is having a hard time explaining it.
In recent weeks, NAACP Washington Bureau Director Hilary Shelton has been besieged by lobbyists on swipe fees, meeting with as many as four groups about the issue in a single day. After backing the Durbin amendment throughout 2010, Shelton penned a letter to House Speaker John Boehner (R-Ohio) in March, saying the NAACP supported a study on the Fed’s swipe fee rule to ensure that it would have no harmful effects on consumers.
Immediately after the letter became public knowledge, Shelton says he got a call from Durbin’s office. Two days later, he was meeting with an official from Walmart. In April, Shelton clarified his letter to Boehner, insisting that the NAACP continues to support swipe fee reform, but wants to see a study completed prior to July 21.
Also, here’s an important point (my bold):
When the American Bankers Association, which represents banks of all sizes, held its mid-March meeting at in Washington, swipe fees were the group’s top legislative target. ABA COO Michael Hunter coached a packed hotel ballroom of small bankers about ways to plead their case on Capitol Hill — focus on staffers, Hunter said, noting that actual members of Congress might not remember their names or be fluent on the swipe fee issue.
All the more reason to watch where staffers get jobs when they leave Congress.
1) Merchants hate all kinds of costs. Adam Levitin has some follow-up, explaining specifically what the battle is over in regards to interchange:
[W]hat galls merchants about swipe fees is that they have no ability to negotiate over them as they do with other costs of business. For example, Home Depot can’t get lower MasterCard swipe fees by making it the “top shelf,” preferred payment method. And merchants can’t pass along swipe fees to card-using consumers. Payment card network rules say that they have to pass it along to all consumers. These rules are the problem.
It’s as if Visa and MasterCard both operated parking lots that surrounded a WalMart. WalMart can’t really operate unless there’s parking for customers, and it won’t be unreasonable for those customers who park to have to pay for it. Similarly, it wouldn’t be unreasonble if WalMart wanted to offer free parking and to spread the costs to all of its customers.
But that’s not how the MasterCard-Visa parking lot works. Instead of charging those people who choose to park in the lot for doing so or just charging WalMart and letting it do whatever it wants in terms of passing on costs, MasterCard and Visa instead tell WalMart that it is forbidden to charge consumers who use the parking lot more than those who don’t. So WalMart has to charge all of its customers for using the parking lot, even if those customers who walked, took public transit, helicopter or parachute. That’s the antitrust problem–you can pick your friend, you can pick your nose, but you can’t pick your friend’s nose. Same goes for prices. You can pick your prices, you can pick your business counterparties, but you can’t pick their prices. Call this the booger rule of antitrust.
Remember in this bizarre world of broken contracts competition seems to increase interchange. Since my wallet is filled with plastic cards already, the only way to get me to switch to another card is to promise more rewards. The only way to promise more rewards is to soak the merchants. The merchants would normally charge more for that credit card….except they can’t. By contract. Merchants, by contract, can’t discriminate between debit cards and credit cards. Markets are abstractions over the ability to contract, and once the ability to contract is twisted we can get all kinds of neat distortions later down the road, as we see in this market.
2) I’d also add something about the philosophical point on why this is important. Many studies have found that there are regressive transfers in the way the current system works, where people who pay with cash, debit cards or generic credit cards go to pay for rewards for the ultra cards. Like this estimate:
Here’s one sense of it. Research tells us that “Visa Signature cards, which carry a high level of rewards and are marketed specifically to affluent consumers, comprise only 3.5% of all Visa cards but have accounted in recent quarters for 22.2% of all Visa purchases.” Since there can be only one price, all of us without these elite cards have to make up the costs.
We can refer to this as a tax, but another way to think of it is that the majority of Americans need to bribe the financial system in order to fully participate in exchange and trade. We’ve long taken the ability to “truck and barter” as one of the core experiences of the modern individual, and the new medium we use for exchange has been set up in a distorting, upwardly-distributing way. The point of having money – which debit cards are now – is to store value and to use it as a medium of exchange, and the payment system has shifted and blunted our ability to conduct trade among each other using money without having to give the top 3% of Americans and the financial sector a cut.
People cross-subsidize each other all the time. I drink my coffee black and no doubt pay a tiny-bit extra for those of you who use the half-and-half. But that’s a specific purchase – money, the medium we as a society use to exchange goods-and-services, has this distortion through and through. And banks amplify it. This is reforms that target debit cards, cards that reflect our actual money (and not the revolving debt of a credit card). Given that banking regulators regulate the mediums of exchange, given that market exchange is a core experience of citizens in our society, and given that debit cards that reflect our earnings and savings are now part of how we think of the everyday experience of exchange, why should our mediums of exchange now be this bizarre upwardly-redistributive scheme that the bottom 75% have to bribe their way into?