Finally, a Victory Over Wall Street

Retailers, and ultimately consumers, have won a victory over the big banks, albeit a small one.

Earlier this week, the Federal Reserve slashed the fees charged by banks such as Bank of America (NYSE: BAC  ) , Citigroup (NYSE: C  ) , and JPMorgan Chase (NYSE: JPM  ) for debit card transactions.  The debit fees in dispute, so-called interchange fees, are paid by retailers to the banks whenever a customer uses a debit card. The change was part of Dodd-Frank legislation that required fees to be "reasonable and proportional" to the banks' costs. Banks with less than $10 billion in assets are not subject to the law and can charge higher fees.

But the cuts were not as great as the Fed had originally proposed. The Fed's original plan was to cap fees at $0.12 per transaction from the existing $0.44 per swipe -- a 73% cut. The Fed ultimately settled on a cap of about $0.24. The revenue losses from the change run high, with some estimating $12 billion in lost fees before the final cap was established. And that's very high-margin revenue, meaning much of it becomes profit.

No wonder the bankers' lobbyists were out in force opposing the cap. In response to the new rule, the American Bankers Association, a top lobbyist for the megabanks, stated, "The Federal Reserve has taken a significant step in reducing the harm that could have resulted from the proposed rule." If the ABA means harm to the banks' income statements, then it's spot-on. But those banks' profits are ultimately higher costs for consumers.

JPMorgan CEO Jamie Dimon also described the fee restrictions as "price-fixing at its worst," according to The Wall Street Journal. But that's simply nonsense. The banks have had all the pricing power for years.

The real customers of credit and debit card companies such as Visa (NYSE: V  ) and MasterCard (NYSE: MA  ) are not John Q. Public, but rather the big banks themselves. Credit and debit fees have escalated precisely because it's been in the banks' interests to keep them moving up. And retailers and consumers have had little ability to reduce the fees by voting with their feet, since the former are at the mercy of a duopoly, while the latter pay identically higher prices no matter their payment mechanism. For cards, market forces actually work to push prices up.

The new rule should help behemoths like Wal-Mart (NYSE: WMT  ) and Home Depot (NYSE: HD  ) , but will probably help consumers more. Additional credit and debit fees have merely pushed up product prices for all consumers, as the retailers foisted the fees onto shoppers. Since retail is a very price-competitive industry, you would expect to see these fees eroded away by competition, as retailers cut to the bone to score sales.

So while this rule change certainly helped consumers, it could have gone much farther. Every dollar extracted from consumers by the banks' rentier capitalism is one less that is actually going to fuel innovation and future economic development and getting the economy back on track.

Jim Royal, Ph.D., does not own shares in the companies mentioned above. The Motley Fool owns shares of Wal-Mart and JPMorgan Chase. The Fool owns shares of and has opened a short position on Bank of America. Motley Fool newsletter services have recommended buying shares of Visa, Home Depot, and Wal-Mart. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On June 30, 2011, at 12:57 PM, NoWay33 wrote:

    Actually, consumers are big losers in this legislation. You think banks will simply lose all this revenue and shrug shoulders? Prepare for more fees. In addition, countries with similar rules have not seen any reduction in prices at merchants. This only means more money in Walmart's pocket, which I guess is good if you need a job a Walmart.

    Besides, should the government really be price fixing? I mean, why stop there? Maybe I can get the price of my Starbucks lowered. Maybe they'll lower the cost of my Direct TV. I think iTunes songs cost too much. Lots of opportunities for Congress to legislate.

  • Report this Comment On June 30, 2011, at 1:18 PM, kbkociolek wrote:

    This is all fine and good that the gov't (FED) steps in and puts limits on bank fees for these transactions because it is a monopoly, but why is it ok for these retailers who are charged these fees to charge consumers 25-30% on the company credit cards? Why are they allowed to charge 20% on a credit card. It seems no one cares about the real consumer beside big business.

  • Report this Comment On June 30, 2011, at 1:31 PM, Carioca58 wrote:

    "Besides, should the government really be price fixing?"

    Because in a market where a monopoly or a cartel prevails, the government must act to prevent abuse. "Market forces" only work well when there is competition, which is not the case here.

    "why is it ok for these retailers who are charged these fees to charge consumers 25-30% on the company credit cards"

    The store credit cards are not owned by the stores. They are owned and managed by whatever bank they contracted to do it (think HSBC, American Express, etc.). I am not entirely sure, but I believe this legislation also affects these cards. Check the correspondence you get from them at home.

    To answer your question, this time there is some level of competition: the customer can always go to another store that has a better store card.

  • Report this Comment On June 30, 2011, at 1:49 PM, Borbality wrote:

    Banks will raise fees and try to get you to make more late payments on credit cards, but the question remains: Why go to a big bank in the first place?

  • Report this Comment On June 30, 2011, at 2:07 PM, MaxTheTerrible wrote:

    Retailers (and consumers) are not totally helpless when it comes to these fees. The former can pass them on to consumers as a separate charge (think of it as a "convenience tax") and the latter can choose to forgo the charge by using cold hard cash.

    My local gas station, for example, has lower gas prices for cash transactions. A pizza shop around the corner from my office charges and extra 50c if you use charge vs. cash. I don't see why WalMart could not implement something similar.

    So IMHO they should have left the banks with their fees alone and let the market forces establish that golden median of what most of us would consider an appropriate premium for not carrying around wallets full of money.

    Cheers!

  • Report this Comment On June 30, 2011, at 2:10 PM, MaxTheTerrible wrote:

    Also, if you think this is victory, just wait until free checking accounts disappear...

  • Report this Comment On June 30, 2011, at 2:41 PM, False1 wrote:

    C'mon, this is naive at best. Do you really think that this "savings" is going anywhere but to big retailers' bottom lines?

    A) Walmart is highly unlikely to initially or consistently reduce their prices to pass all this savings along to consumers, and...

    B) Would you notice it if they did? This reduces the fees on a $100 debit card transacation to the retailer by what, $.20?

    C) Great! That $.20 Walmart passes on to to Joe Consumer represents 1/50th of the money he's paying in the form of increased fees to his bank.

    I would argue that the consumer is getting absolutely screwed here, that they will not see a reduction in prices (and DEFINITELY not a material one), yet they will see an increase in fees paid for financial services and a loss of benefits from those services that used to be subsidized by debit interchange.

    Why did this legislation not include any stipulations on what happens with that interchange save? I'd bet LARGE that if an audit were to be completed 24 months from now, the VAST majority if not all of that save can be found in the bottom lines of big retailers.

    But hey, good job Senator Durbin. You really thought this one through, and I'm sure you really have the little guy in mind with this one.

  • Report this Comment On June 30, 2011, at 5:18 PM, mrkhan1024 wrote:

    As the article says, there is no price competition in the debit interchange industry because banks shop for cards based on the ability to charge retailers the highest fees possible. Obviously Main Street suffers the most (larger companies negotiate better rates), and the consumer follows close behind, while the banks cash in. Banks keep you blind to this because all you see is "FREE CHECKING" and the convenience of debit cards. This is not how a free market operates, or at the very least, it's a bastardization of a free market.

    So anyone arguing that this ultimately hurts consumers is off their rocker. If you no longer get free checking, or you have to start paying for using a debit card, it'll be a direct result of you not paying it at a register. And sure, maybe companies will not initially lower prices to compensate, but I dare think it'll make them think twice before raising prices, and it'll certainly help the little guy.

    This is a win for Main Street. That said, I don't necessarily like the implementation, to be honest. The real problem is essentially the Visa/MC duopoly, and the lack of competitive choices offered by banks. Break that up and you give retailers a choice, and giving them a greater choice of cards to carry might create competition.

  • Report this Comment On June 30, 2011, at 6:01 PM, mrkhan1024 wrote:

    @False1:

    First, not every transaction is a $100 transaction. The average is about 2% of the transaction, meaning that you're talking $2 for that swipe. Dropping it down to 21 cents is a huge difference.

    Of course, the fee is typically set up as something like "13 cents per swipe + 1.2% of the transaction". In that scenario, a $100 transaction costs $1.33 in interchange fees, or 1.33%. If that same fee is applied to a $5 purchase, the cost is $0.19, or 2.5% of the transaction.

    Therein lies the real problem with the Durbin Amendment - it doesn't resolve that problem, as far as I know. A better system would've been to set the maximum interchange fees at THE GREATER of 12 cents or 0.5% of the purchase price.

    But here's the real fact of the matter. Retailers had no choice but to accept whatever fees were charged or put themselves out of business by not accepting debit cards. And the card companies had them by the you-know-whats and they knew it, and that's why those fees have tripled in the last 10 years. True story.

    Now banks will have to compete to earn that business back. Before they just all offered free checking, free debit cards, and a paltry interest rate. Now perhaps one bank will offer a checking account for $5/month, while another will offer $10/month but 1% interest, and another might offer free checking but charge you 25 cents per debit card usage. That's competition. We didn't have that before.

  • Report this Comment On June 30, 2011, at 8:35 PM, False1 wrote:

    @mrkahn... Anyone who doesn't see this as a win for consumers is off their rocker? That's some spirit of optimism you have there. Retailers haven't been pushing/lobbying for this for years simply to help the little guy. They've done it to reduce their expenses. Frankly I think it is asinine to assume that consumers are a) going to receive and b) notice a difference even if there is one.

    Where did you get the 2% from? Even if we assume that is accurate, it will be cut ~50% right? So the "save" that is created will be $1 for every $100 purchase? What share of that do you think Walmart is going to pass to you and me?

    Even if Walmart went all Robin Hood and passed 100% of that to me, if I spend $1,000 each month on my debit card (which I probably don't), that's $10 less out of my pocket. Boy, that sounds a lot like what many people can expect to pay their bank to offset that lost revenue. I know this is an oversimplified best case scenario, but at best this is a push for the consumer. If Walmart banks (pun intended) some of that save, then the consumer is upside down.

    I absolutely agree with you on one thing though... that the interchange completely ignores the purchase amount... there should be a per swipe minimum that covers cost to provide the service, and as you say a rate that kicks in to address larger payments that carry larger risks of loss.

    Let me know how much your grocery bills go down starting in October. I'm not holding my breath personally. :)

  • Report this Comment On June 30, 2011, at 10:55 PM, MaxTheTerrible wrote:

    @mrkhan1024 "But here's the real fact of the matter. Retailers had no choice but to accept whatever fees were charged or put themselves out of business by not accepting debit cards."

    Like I said, Main street already figured out that you can just directly pass the cost of the swipe to the consumer (and offer a discount if the consumer uses cash). So retailers do have a choice.

    Also no matter what shade of pink glasses I put on, I just do see a win for the consumer in all of this. In the end, consumer will pay one way or another for the banks lost revenue, and as a law of unintended consequences dictates this cost will most likely be higher than whatever "savings" realize (if any).

  • Report this Comment On July 01, 2011, at 11:42 AM, mrkhan1024 wrote:

    Just testing to see if I need to repost a response. I put one in about an hour ago and I think it broke apart into 1's and 0's...

  • Report this Comment On July 01, 2011, at 1:34 PM, mrkhan1024 wrote:

    Both of you are assuming that the savings businesses receive from this bill will be passed along to the consumer via fees on checking accounts. The money made by the banks comes from businesses, who determine their prices based on the costs, a component of which is debit transactions. Since everyone pays this additional cost (unless the company is giving a discount for cash transactions), you have just proven that your free checking is subsidized by the people who pay by a means other than debit, which is unfair and a basic fallacy of your arguments.

    Furthermore, the difference between this and the old system will be that banks will have to compete to earn your business. Putting numbers on this, there are approximately 200 million checking accounts in the U.S. The highest estimate I've seen for the total of debit interchange fees last year is $25 billion. Let's assume the banks lose approximately $12 billion / 200 million = $60/year. Barring outright collusion, here's what should happen:

    Bank A is greedy and charges you $5/month in an attempt to make back the money lost.

    Bank B is willing to accept lower profits or is more efficient and only charges you $3/month.

    Bank A then has to compete, so perhaps they offer free checking with a $2000 minimum deposit and/or with 25 cents charged per debit card use.

    That's the free market, which is not what we have now. The interchange fees virtually TRIPLED in the last 10 years because of the anti-competitive nature of that market, as discussed. The numbers still are pretty small, but again whether the businesses eat the cost or pass it on to the consumer, somebody was paying that $5/month so you could have free checking and unlimited debit swipes. (and under this system, they'll

    continue to do so at 21 cents / swipe)

    Instead of price fixing, the right solution would've been to make debit interchange fees illegal and instead force banks to push that charge to consumers, just like ATM's.

    @MaxTheTerrible: Point taken regarding discounts for cash. I doubt there are any statistics as to whether Main Street loses sales that way, but I'd think it's miniscule. That said, you have pointed out an inequity in the system that the boutique down the road has to dissuade people from debit while Wal-Mart gladly accepts

    (because of volume).

    @False1: I got the 2% from the below link, and you can verify through the footnotes.

    http://en.wikipedia.org/wiki/Interchange_fee

    For the example of 13 cents + 1.2% on a $100 transaction, a 21-cent maximum saves the business about $1.12. The average charge is 44 cents right now, which suggests a $22 average swipe based on 2%. Plugging $22 into the above equation give you about 40 cents, so I'm pretty close to reality.

    Even if the numbers are relatively small, it's completely asinine to think that hasn't directly been pushed back on consumers. Let's take Wal-Mart as an extreme example. Their profit margin is about 6%. If debit cards represent even 20% of their business and costs them 2% of that total, that's 0.4%, or almost 7% of their profit going directly to the banks. Gas stations get hit particularly hard.

  • Report this Comment On July 01, 2011, at 7:36 PM, gstanski wrote:

    The latest version of the Fed’s final debit interchange rule has not changed much. It is still good news for retailers and bad one for issuers. It is also still bad news for consumers who are already feeling the rule’s side effects, even before it has taken effect. Anticipating lower revenues, banks have begun creating new or expanding existing revenue sources. As a result, free checking accounts are going away, new bank fees are being introduced and old ones increased, interest rates are being hiked, rewards are being slashed, etc.

    So the damage to consumers is already done and it will not be reversed, even if the Fed eventually decided not to change the interchange status quo after all. What we have here is a government-mandated redistribution of revenues from one industry to another, something it has no business doing. http://blog.unibulmerchantservices.com/debit-card-fee-limit-...

  • Report this Comment On July 02, 2011, at 1:41 PM, False1 wrote:

    @mrkahn... I disagree with many of your statements, but I suppose the evidence will be in what happens from here going forward. Costs to bank will go up for consumers, and prices to consumers will not go down.

    How much of a retailers profits go to advertising? Let's go regulate that so retailers make more money, no?

    The reality is retailers have to accept payments, and their costs for accepting plastic-based payments are lower than taking cash, checks or alternate forms of payment. Debit cards allow customers to have their entire checking account balance at their immediate disposal, which keeps sales from walking out on retailers because they don't have enough cash on hand or don't have their checkbook. There are real benefits to retailers as a result of accepting debit card payments... why should that cost be passed on to the consumer? That's preposterous.

    Retailers want their cake and to eat it too. Some retailers would only accept debit for transactions exceeding a nominal amount. Some retailers like gas stations would add a fee for accepting debit, in turn passing a savings on to customers that pay in forms that, for their particular business, are preferable.

    Even if you agree that interchange was anti-competitive, this couldn't have been addressed any less effectively than it was. If I were a merchant that sold higher end goods, I'd be concerned that banks may be forced to limit the amount of a debit card transaction based on the fact that they are being asked to accept ~$.20 in revenue that doesn't even come close to accounting for the cost of the transaction to the bank in terms of processing, servicing, fraud, etc.

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