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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.