Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Coinbase vs Binance for Bitcoin, Ethereum Crypto Trading & Investing During Bear Market 2021 - 11th Jun 21
Gold Price $4000 – Insurance, A Hedge, An Investment - 11th Jun 21
What Drives Gold Prices? (Don't Say "the Fed!") - 11th Jun 21
Why You Need to Buy and Hold Gold Now - 11th Jun 21
Big Pharma Is Back! Biotech Skyrockets On Biogen’s New Alzheimer Drug Approval - 11th Jun 21
Top 5 AI Tech Stocks Trend Analysis, Buying Levels, Ratings and Valuations - 10th Jun 21
Gold’s Inflation Utility - 10th Jun 21
The Fuel Of The Future That’s 9 Times More Efficient Than Lithium - 10th Jun 21
Challenges facing the law industry in 2021 - 10th Jun 21
SELL USDT Tether Before Ponzi Scheme Implodes Triggering 90% Bitcoin CRASH in Cryptos Lehman Bros - 9th Jun 21
Stock Market Sentiment Speaks: Prepare For Volatility - 9th Jun 21
Gold Mining Stocks: Which Door Will Investors Choose? - 9th Jun 21
Fed ‘Taper’ Talk Is Back: Will a Tantrum Follow? - 9th Jun 21
Scientists Discover New Renewable Fuel 3 Times More Powerful Than Gasoline - 9th Jun 21
How do I Choose an Online Trading Broker? - 9th Jun 21
Fed’s Tools are Broken - 8th Jun 21
Stock Market Approaching an Intermediate peak! - 8th Jun 21
Could This Household Chemical Become The Superfuel Of The Future? - 8th Jun 21
The Return of Inflation. Can Gold Withstand the Dark Side? - 7th Jun 21
Why "Trouble is Brewing" for the U.S. Housing Market - 7th Jun 21
Stock Market Volatility Crash Course (VIX vs VVIX) – Learn How to Profit From Volatility - 7th Jun 21
Computer Vision Is Like Investing in the Internet in the ‘90s - 7th Jun 21
MAPLINS - Sheffield Down Memory Lane, Before the Shop Closed its Doors for the Last Time - 7th Jun 21
Wire Brush vs Block Paving Driveway Weeds - How Much Work, Nest Way to Kill Weeds? - 7th Jun 21
When Markets Get Scared and Reverse - 7th Jun 21
Is A New Superfuel About To Take Over Energy Markets? - 7th Jun 21
Why Tether USDT, Stable Scam Coins Could COLLAPSE the Crypto Markets - Black Swan 2021 - 6th Jun 21
Stock Market: 4 Tips for Investing in Gold - 6th Jun 21
Apple (AAPL) Summer Correction Stock Trend Analysis - 5th Jun 21
Stock Market Sentiment Speaks: I 'Believe' We Rally Into A June Swoon - 5th Jun 21
Stock Market Russell 2000 After Reaching A Trend Channel High Flags Out - 5th Jun 21
Money Is Cheap, Own Gold - 5th Jun 21
Bitcoin and Ravencoin Cryptos CRASH Bear Market Buying Levels Price Targets - 4th Jun 21
Scan Computers - How to Test New Systems CPU, GPU and Hard Drive Stability With Free Software - 4th Jun 21
Hedge Funds Getting Bullish on Gold - 4th Jun 21
THERE ARE NO SOLUTIONS When the Media is the VIRUS - 4th Jun 21
Investors Who Blindly Trust the ‘Experts’ Will Get Left Behind - 4th Jun 21
US Stock Market Indexes Consolidate Into Flagging Pattern – Watch For Aggressive Trending Soon - 4th Jun 21
Microsoft (MSFT) Stock Trend Analysis - 3rd Jun 21
No More Market Bloodbath – Beyond Cryptos - 3rd Jun 21
Bank run, or run from the banks? - 3rd Jun 21
This Chart Shows When Gold Stocks Will Explode - 3rd Jun 21
The Meaning Behind Gold’s Triple Top - 2nd Jun 21
Stock Market Breakout Or Breakdown – What Does The Next Big Trend Look Like? - 2nd Jun 21
Biden’s Alternate Inflation Universe - 2nd Jun 21
What You Should Know Before Buying Car Insurance - 2nd Jun 21
Amazon (AMZN) Stock Summer Prime Day Discount Sale - 1st Jun 21
Gold Investor's Survival Guide - 1st Jun 21
Silver and Copper to Benefit from Global Electrification Push - 1st Jun 21
Will Gold Shine Under Bidenomics? - 1st Jun 21
Stock Market Buy the Dip, Again?! - 1st Jun 21
Stock Market Consolidation Ahead - 1st Jun 21
Stock Market Summer Correction Review, Crypto CRASH, Bitcoin Bear Market Initial Targets - 31st May 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Debit Card Interchange Fees and the Politics of Lobbying

Politics / Credit Crisis 2011 Jun 01, 2011 - 03:28 AM GMT

By: Fred_Sheehan

Politics

Best Financial Markets Analysis ArticleLegislation to modify debit-card interchange fees cannot compete with celebrity gossip. Yet, exhausted carcasses are carried on stretchers from the senate office buildings. The Huffington Post explained: "A full 118 ex-government officials and aides are currently registered to lobby on behalf of banks in the fee fight... Retailers have signed up at least 124 revolving-door lobbyists.... The flood fills the hallways with lobbyists and deluges the airwaves with ads. For weeks, Washington's Metro system has been papered with... ads on trains and station walls."


Buy NowIt is not surprising that lobbying efforts have changed the minds of 19 senators who formerly aligned themselves with consumers and small banks (to which the lower fees do not apply.) The legislators have now hopped in bed with Too-Big-to-Fail Banks. That is politics as we know it. What might be confusing is the about-face of Federal Reserve Chairman Ben S. Bernanke. He, too, is cohabitating with Wall Street. Yet - and this is the astounding twist - it was under his signature that the new regulations were written.

Before discussing the legislation, a few words on the financial stakes. Annual debit-card interchange fees (generally called "swipe" fees, and, please note: this tussle does not include credit cards) in the United States were $16 billion in 2009. The 10 largest banks collected $8 billion. In the opposite corner are businesses and consumers. Interchange fees are the second largest expense, after labor, for retailer Target Corporation. It is not clear, but looks as though this includes debit- and credit-card costs. Studies in countries where swipe fees have been capped show more than half of the cut show up in lower retail prices, so the consumer wins. The process of when, and by whom, fees are paid and received is below.

The history of the legislation is straight-forward. An amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act required the Federal Reserve to decide whether debit card interchange fees are "reasonable." This is referred to as the "Durbin amendment," named after Senator Richard Durbin of Illinois, who proposed the change. The Fed's study was added to the Federal Register on December 28, 2010 (officially: Federal Reserve System 12 CFR Part 235 Debit Card Interchange Fees and Routing; Proposed Rule). The paper was issued by the "Board of Governors of the Federal Reserve System," of which Ben Bernanke is the chairman. The research was the work of others, but the conclusion bears his signature. Just as a partner at an accounting firm is responsible for an audit he signs, this is Bernanke's opinion.

The swipe fee is incurred at the point a debit card is used to pay for a transaction. Many financial institutions issue debit cards. Most banks in the United States are in either the Visa or MasterCard network.

Visa and MasterCard set the swipe fees in their networks. The merchant (Target, for example) pays the interchange fee to the card-issuing bank (Chase, for example). The customer does not see it, but this is an expense (a reduction in revenue received) for Target or a laundromat. The merchants increase the price of tires and laundry in compensation. At the same time, this is revenue for the issuing entity, whether J.P. Morgan (under the Chase brand name), or the Bailey Building and Loan.

The Federal Reserve's study found "reasonable" fees should be decreased. In 2009, the "average interchange fee for all debit transactions was 44 cents per transaction....Issuers reported median per-transaction total processing costs for all types of debit and prepaid card transactions was 11.9 cents." (Fed study.) The Fed proposed a cap of 12 cents per transaction. This fee allows "for the recovery of per-transaction variable costs for a large majority of covered issuers (approximately 80 percent)."

Costs per transaction are, in part, a matter of scale. The aforementioned Chase, for instance, should have much lower per transaction costs than the Bailey Building and Loan. The Fed, in its study, proposed that banks with less than $10 billion in assets be exempted from its proposed cap. They would continue to receive the average cost per transaction of 44 cents (assuming the 2009 level).

The Fed's study was unsympathetic to large issuers with poor cost controls. The Federal Reserve Board of Governors' 12 CFR Part 235 states: "The Board does not believe it is reasonable for the interchange fee to compensate an issuer for very high per-transaction costs." Footnote 23 (to 12 CFR, etc.) offers a good reason for this position. It states that PIN debit transactions (this does not include checkbook transactions) rose from 7 cents per transaction in the late 1990s to 23 cents in 2009. PIN transactions have been increasing in proportion to checkbook transactions.

Whether the Board of Governors considered the implications of footnote 23 is theirs to know, but it throws a dishrag on the near unanimous opinion that technology has created efficiencies and reduced costs, the latter often taking the form of fewer employees. There is also the question of why, in the land of whiz-bang digitality, debit-card fees are among the highest. There are no - 0.0000% - fees in Canada, the country with the highest debt-card usage rate in the world. It follows that Canadian banks are willing issuers of debit cards and that they make money without a swipe fee.

Technology has reduced the cost of PIN (electronic) transactions. This raises the query of whether inept bank management and derivative trading have been spread across unrelated portions of the Too-Big-to-Fail banks' profit centers. The Federal Reserve should conduct another study to unearth such gerrymandering, given the large banks' passion for circuitous accounting.

Recall that on December 28, 2010, Ben Bernanke submitted the Fed's proposal to reduce swipe fees. On February 17, 2011, the chairman of the Board of Governors testified before the Senate Banking Committee. Now, he did not think cutting fees was a good idea. He warned that merchants (stores) might refuse to accept debit cards issued by small banks because those banks receive higher interchange fees. Bernanke also cautioned that card networks might be unwilling to operate a "two-tier" system with different interchange fees (the 12 basis points cap for banks with assets over $10 billion and 44 basis points for banks with assets under $10 billion).

We have arrived at the fun part: motives. Motives are rarely clear, usually confused, so everyone is qualified to play. The long-term contention held here, that Ben Bernanke is a dimwit; a pedestrian, college administrator who allotted prime parking spaces to influential faculty; has not persuaded many. (For those still willing to give it a try, please see: Orwell Targets Bernanke: An Unteachable Hole in the Air and Ben Bernanke: The Chauncey Gardiner of Central Banking.) Critics of this conclusion may be right: their contention being that Bernanke and the Fed serve the bankers and, likewise, some politicians are also lackeys: look at their campaign contributions. Senator Durbin implicitly agreed when he said of fellow senator Chuck Schumer from New York (an opponent of the amendment): "Listen, I know the zip code for Wall Street and I know what state it's in."

On the same day (February 17) Senator Durbin fired off a reply to the Fed chairman. In brief: 1 - In January, Visa had already announced it was designing a 2-tier interchange fee system, 2 - This was not virgin territory since both Visa and MasterCard already had several different tiers for such categories as corporate cards, supermarkets, utility bills, and overseas payments, 3 - merchants could not reject bank cards from smaller banks. It is in their contract with Visa or MasterCard: "Merchants are subject to severe penalties if they decline to accept a network's card on the basis of the card's issuer." (Durbin letter to Bernanke.)

Chairman Bernanke, who, again, authorized the rule changes, had now, on February 17, testified against the rule changes, for reasons that did not apply to the rule changes.

It is the latter part that is nearly inexplicable. How could Bernanke show up at a Senate hearing and not know his contentions were factually wrong? He has 220 Ph.D.'s at the Fed who live and breath to impress the Fed mandarins. Surely, Fed staffers shared their research (most of which can be read on Visa's and MasterCard's websites) with the chairman. How did he graduate from the third grade? One possibility, for both his F-minus performance and third-grade promotion, is a parallel briefing by the American Bankers Association.

Between December, 2010, and February 17, 2011, a massive battle was waged. A small mountain of letters and press releases passed between lobbyists, senators, and special-interest groups. The "nays" won where it matters: senators and the Fed chairman changed sides.

The ABA wrote to Senator Durbin on February 8, 2011. It aligned itself with the small banks for the obvious reason that arguing for the interests of J.P. Morgan or Citigroup is not a vote-getter. The ABA claimed merchants would discriminate against small banks since those banks with assets under $10 billion would still charge 44 cents per transaction (all else remaining equal), a greater depletion of the merchant's revenues than the new 12 cent cap for large banks.

Senator Durbin replied to the ABA on February 11, 2011. He reminded the ABA (which must have known) that Visa's contract with merchants prohibits such discriminatory behavior and that Visa had already announced (on January 7, 2011) it "would implement different interchange rate schedules for large and small banks." Six days later, Simple Ben tried to wing the same bag of baloney at the same senator.

So, a possible explanation of F-Minus Bernanke: his argument did not matter. "The Fed chairman opposes the Durbin amendment," was parroted through the hallways and on the airwaves, all that was needed for day-trading politicians to hide in the tall grass.

Before moving on to Bernanke's, most-recent, May 12, 2011, testimony, it is worth a moment to illuminate the characters Bernanke has aligned himself with. On April 5, 2011, J.P. Morgan Chase's CEO, Jamie Dimon, before the Council of Institutional Investors, stated the Durbin amendment was "counterproductive" and "downright idiotic." This is fine thanks to the government that; if not for the good graces of Geithner, Paulson, and Bernanke; might have thrown Jamie Dimon in a high-security federal penitentiary where he would now be smashing large rocks into little rocks as punishment for his bank's reckless behavior leading up to the 2008 financial evaporation.

Dimon whined that J.P. Morgan would have to raise other fees to compensate for its projected losses. Good. Maybe it is so uncompetitive it will abandon the debit card business. It could do us all a favor by shutting down the rest of its Too-Big-to-Fail-or-Save business lines at the same time.

J.P. Morgan Chase also terrorized America's children when it banned them from Disneyworld. A notice to its customers states: "Congress recently enacted a new law known as the Durbin Amendment that significantly impacts debit cards. As a result of this law, we will be changing our debit rewards program. After July 21, 2011, you will no longer earn Disney Dream Reward Dollars when you use your Disney Rewards Debit Card."

Senator Durbin replied to Dimon's tantrum on April 12, 2011. He wrote that those who pay the most for higher swipe fees are the poor. Twenty-five percent of Americans do not have a bank account, pay with cash, so (quoting the Huffington Post) there is "no question that the resulting higher prices [that retailers charge to compensate for swipe fees] hit the poor hardest of all." Durbin reminded Dimon that last year his bank had $17.4 billion in profits and he was paid $20.8 million. Bernanke has chosen some fine bedfellows.

It is a strange mix now serving the Morgan Interests: a mothballed phrase from a century ago that is more fitting now than then. These include the ABA, the NAACP, the Christian Coalition, Barney Frank (co-author of the Dodd-Frank Act), Grover Norquist, and leading Tea Party groups Freedom Works and Americans for Prosperity (from the Huffington Post, which has done an excellent job of covering the story). Also, the Independent Community Bankers of America (ICBA), the trade association for small banks, is lobbying against the small banks, probably to protect the ICBA Bancard, a money-maker of such grand proportions that it would be subject to the rate caps. (Simon Johnson, New York Times, May 12, 2011)

On May 12, 2011, Bernanke testified again before the Senate Banking Committee. When questioned, the chairman stated: "Well, it's going to affect the revenues of the small issuers and it could result in some smaller banks being less profitable or even failing." Barney Frank is using Bernanke's misgivings as an excuse to sandbag his own bill. Senator "Durbin is as exasperated by Frank as he is by Bernanke. "I don't understand it," he says. "I wrote [Barney Frank] a letter and asked him... 'What are you doing?' We had long talks when we were writing this thing, [when we] worked on it together." (Huffington Post)

Ben Bernanke is of a type. Anyone who has worked at a state house or city hall or court house has met him. The type is common, too, on college campuses where merit is judged by conformity of thought, submissive allegiance to the hierarchy (see BB's nauseating, "thanks to you, we won't do it again," to Milton Friedman, November 8, 2002), and obedience to the bureaucracy.

George Orwell wrote that the intelligentsia is "power hungry" and (individually) "is capable of the most flagrant dishonesty, but he is also - since he is conscious of serving something bigger than himself - unshakeably certain of being right." Orwell observed from a front-row seat as the apparently powerful shuddered under the heel and whip like cotton-picking slaves. Writing in 1944: "Hitler's puppet government are not workingmen, but a gang of bankers," and other specimens of the type under review.

The type was described by Giorgio Bassani in his novel, The Garden of the Finzi-Continis. Set in Ferrara, Italy, in the late 1930s, a rising mediocrity in the Fascist University Students Association (Gino Ciariani, by name) halted a tennis tournament because a Jewish player was winning. In the words of an observer at the tennis match, (with a few substitutions, in brackets, to replace Gino Giariani with Ben Bernanke): "It was all too obvious: dimwit that he was... [H]is sole thought, from the first moment he had entered [MIT's graduate school of economics], had been to make a career, and for this reason he had never overlooked the opportunity, in public or in private, to lick the feet of [academic economists]. The moment [Hank Paulson] or some other big shot of the group put him in his place, he promptly tucked his tail between his legs, capable, to win forgiveness and be restored to favor, of even the most humble services: running to the tobacconist's to buy the secretary a pack of Giubek's, [starving elderly Americans by confiscating their interest rate so Jamie Dimon could make more money].... [A] worm of that sort... surely hadn't missed the opportunity to show off, once again, for the party officials!"

By Frederick Sheehan

See his blog at www.aucontrarian.com

Frederick Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, November 2009).

© 2011 Copyright Frederick Sheehan - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in