Huffington Post’s Amazing Article on the Interchange Battle

“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.

We’ve written a lot (here here and here among others) on the topic of interchange reform and the Durbin amendment, and I’d like to add two quick thoughts.

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?

This entry was posted in Uncategorized. Bookmark the permalink.

11 Responses to Huffington Post’s Amazing Article on the Interchange Battle

  1. Michael says:

    Maybe this is in the regulation (I haven’t read it, because I only ever read about regulations), but why focus on regulating the cost of swipe fees? If the issue is that merchants can’t pass the price on to card users, why not regulate that aspect? Some merchants might choose not to charge different prices based on payment types, some will, and we’ll see what effect that has on the fees charged by the banks.

  2. dictateursanguinaire says:

    Great summary, Mike. Goes a long way to putting to lie the “Soviet-style price controls” charge being levied at the reform. Although, I’m still wondering about potential perverse consequences, but the idea that this market exhibits fair competition, as some people have alleged, seems pretty fallacious.

  3. Even if people were not charged the overhead created by swipe fees because they paid cash, or paid with a check or debit card, those who do use a credit card don’t like being charged a huge interest rate AND a mark-up (the swipe fee), that others with more money don’t have to pay.

    Since MOST PEOPLE owe their job in one way or another to the use of credit cards by customers who buy products and services from the company they work for, trying to separate those who use a credit card, charge them a high interest rate PLUS the even higher swipe fee passed on to the consumer who uses a credit card, draws the ire of customers and can be viewed as discriminatory, and is elitist because ALMOST EVERYBODY benefits from the use of credit cards, (when it comes to job creation, however the interest rate than ruins all the goodwill that was created up front).

    Some people use credit for the safety of it. They don’t want to carry hundreds of dollars of cash with them at all times, so to penalize them for using a credit card for safety reasons could lead to lawsuits by those robbed because someone saw their wad of cash. Forcing someone to save money by putting them at a higher risk of being robbed because they now have to carry cash is not necessarily something that should be championed.

    • Michael says:

      I believe the idea is that given the nature of the contracts the merchants sign with the credit card companies, there is no way for consumers to respond to the costs of interchange fees by consuming fewer of them. Ultimately, this leads to excessively high fees which are then built into the prices of goods in general. The idea is that if you were able to charge more based on which type of card you used, the various providers would be forced to compete with each other in brining fees down. In aggregate, people paying in either cash or credit would pay less. In theory.

      On a separate note, my I recommend you use the html tags to emphasize certain words. Using caps lock gives the impression that you are YELLING.

    • Tim says:

      Why are you at higher risk of being robbed? Do people have x-ray vision or something? People can’t tell when you’re carrying cash or credit cards, by the way. You only find that out DURING the process of robbing someone.

  4. By the way, it SICKENS ME to see Huffington Post mentioned in such a reverential way when it was Huffington Post who misled the american people about Hillary Clinton and turned their on coverage of the 2008 democratic race into a mockery of epic proportions.

    If you didn’t call out Huffington Post in 2008 for the WORST, MOST BIASED COVERAGE ever of a democratic race by a supposedly neutral news teller, but now praise them, you are a BIG PART of the problem.

    I researched how much of a scumbag Huffington Post was in 2008. Yet YOU IGNORE my journalistic research because I’m not somebody you know in your cliche, making your observations as biased as your acolades for Huffinton Post.

    If you’re going to whore your platitudes for those who may be able to offer you something, at least admit you’re a whore.

    • Tim says:

      Uh, he posted that they were good articles. It’s too bad that you don’t like Huffinton, which is beside the point. But Mike didn’t say anything about the overall quality of the site, you read that into his words. Stop putting your (crazy) internal dialogue into a (good) post that has nothing to do with it.

  5. Ultimately, the ‘real economy’ solution to ‘swipe fees’ and whatnot is for consumers to stop …

    … being consumers, that is. Peeps will stop buying and start saving/hoarding in order to save/hoard their own rear ends! The saving process is ‘progressive’, legal, self- interested and devastating to big banks, big stores and big plutocrats alike. Why? Because these companies’ business model(s) all require an endless increase in the flow of funds from suckers. It’s do or die for them, hence the struggle.

    It’s also do or die for us. Gimme a choice between me in a year versus Visa/Mastercard in a year and there is no contest. V/M can starve.

    Guess what? This diabolical dynamic is coming, anyway! Peak oil driven high fuel prices allocate output/demand (purchase money) away from ‘Brand X’ goods toward fuel. This presses fuel prices higher, amplifying the vicious (virtuous) reallocation cycle. The result is effectively less to shop for, at which point the massive debts that overhang the entire enterprise become unserviceable. OUCH!

    Even with purchase money growth the debts are unserviceable. Economic modernity is played out. Whether there are credit/debit cards or not is becoming irrelevant, the issue is will there be money at all?

    Hoarding, non-consumption, learning, interacting, trading services with other ‘nay- boars’ will become the new (and permanent) trend.

    No credit, no Visa, no Internet, certainly no carz, maybe no electricity or no Congress, either. Problem solved.

  6. Mark T says:

    Is this really just a $238 million issue (table)? If so, what a waste of energy.

    • bjk says:

      It is bigger than $238 mm, but it is an astonishing amount of wasted energy. If you compare the effect of immigration vs. interchange on the working class, it becomes clear that progressives are more anti-business than pro-worker.

  7. Pingback: Green Alert: Banks Use Bush Terror Team, Threat Tactics to Push Debit Card Fees : YOU GO USA

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s