Wednesday, October 12, 2011

How Walmart and the Retail Lobby Used Regulatory Robbery to Squeeze Banks, Consumers

Here's some more public choice economics to follow the post below about Google's Chairman - this public choice analysis comes from Washington Examiner's Tim Carney about the recent announcement that Bank of America will begin charging a $5 monthly fee to debit card customers: 

"The real culprit is Walmart and the retail lobby, which used government to squeeze banks and fatten their own bottom line. Walmart won, banks lost, and now customers are stuck with a new monthly fee.    

Here's the background: Whenever you use a credit card or debit card to buy something at a store, the credit card processor (like Visa or Mastercard) and the issuing bank (like Bank of America or Chevy Chase Bank) both take a cut. The store may only get $9.70 on a $10 purchase.

How is that rate -- the "interchange fee" -- set? Until this year, it was set by market forces. Visa and Mastercard offer stores a service that facilitates sales and brings in more business. In return, they demand a cut of the sale. Walmart and Joe's Corner Store aren't required to accept debit cards or credit cards, but they do, which means that they decided the price was worth it.

Retailers, of course, wish the card issuers and processors would provide this service for free. Businessmen are always looking for a better deal. The businessmen in this case decided to employ regulatory robbery to get their way. Led by Walmart and the Retail Industry Leaders Association, retailers pushed for a federal cap on interchange fees.

Debit-card users don't have the lobbying clout of Walmart and the retail industry. It's the standard tale of government intervention in the economy: The guy with the best lobbyists wins, and the little guy -- this time, the consumer -- loses."

29 Comments:

At 10/12/2011 6:25 PM, Blogger sethstorm said...

Then cut them out of the process. If it frustrates the businesses and their lobbies from dishonest actions, then you have constructed a good law.

 
At 10/12/2011 7:24 PM, Blogger Hydra said...

The consumer always loses.

 
At 10/12/2011 7:31 PM, Blogger Steve said...

As an economist who believes in the in the power of markets, wouldn't MP tend to say that the lower interchange fees paid by merchants will get passed on as price reductions to consumers, as a result of the price competition between merchants?

And that the markets works better when pricing is more transparent: if it costs a bank to service a checking account, it is better for the bank to charge for those services directly, as opposed to using an opaque funding mechanism unrelated to checking account costs (interchange fee) to subsidize free checking accounts?

---

Carney wrote: "How is the "interchange fee" set? Until this year, it was set by market forces."

Wouldn't the oligarchical nature of V/MC, and their virtual necessity to any retailer, affect the ability of merchant demand to influence interchange prices?

 
At 10/12/2011 7:32 PM, Blogger Marko said...

We need a constitutional amendment imposing a sunset clause on all regulations, and requiring all regulations be approved by congress (not just agencies). Make congress keep voting on all this crap. That is the only way I can think of fixing this problem.

 
At 10/12/2011 7:54 PM, Blogger Larry G said...

well... the folks who hold debit cards from credit unions made out pretty good...

They get the lower prices from WalMart and no fee.....

so dump the banks and join a credit union....

:-)

 
At 10/12/2011 8:55 PM, OpenID Bill said...

This is a pretty superficial analysis.

1) interchange fees were not previously based on a competitive market
2) reduced costs will be shared between retailers and consumers, based on price elasticities

Other thoughts 1) checks and cash clear at par, even though they are not "free", why should debit be different, 2) I'll take retailers over banks every day of the year, 3) costs are now more transparent, allowing people to understand tradeoffs

 
At 10/12/2011 9:10 PM, Blogger Ron H. said...

Steve: "As an economist who believes in the in the power of markets, wouldn't MP tend to say that the lower interchange fees paid by merchants will get passed on as price reductions to consumers, as a result of the price competition between merchants?"

As an economist who believes in the power of markets, I strongly suspect that what MP would NOT say, is that government price controls in the banking system are good for anyone, least of all consumers. This isn't an example of the power of markets.

As is clear from the post, until now the market has decided the correct rate of interchange fees - as it should be - but that rate will now be set by government. Something no one in government can possibly determine.

It should also be clear, that merchants benefit from accepting credit and debit cards, as they allow customers to more easily spend money. The fees have been acceptable to merchants at the market rate, or they wouldn't accept accept the cards as payment.

For BofA customers, at least, these costs will now be paid by them directly in the form of monthly charges for using their debit cards, instead of as a charge included in the price of the goods they purchase.

So no, there is no benefit to consumers from lower interchange fees, as consumers will ultimately pay all costs in any case, no matter what form they take.

And no, transparency as to the fees charged matters little to consumers. They decide to purchase a good based on their sugjective valuation of the good and its total price, not the various components that make up that price.

 
At 10/12/2011 9:18 PM, Blogger Ron H. said...

"The consumer always loses."

For once I agree with you. The consumer always loses when government interferes in an otherwise good working system.

 
At 10/12/2011 9:21 PM, Blogger Ron H. said...

"They get the lower prices from WalMart and no fee.....

so dump the banks and join a credit union....
"

Oh, Look! A free lunch!!

 
At 10/12/2011 9:27 PM, Blogger ws4whgfb said...

markets in everything:

Bank of America will begin charging a $5 monthly fee to debit card customers

There's lot of banks and credit unions that don't charge a fee. Why is competition bad?


The store may only get $9.70 on a $10 purchase.

The old system and the new system are both bad. A good system would involve customers paying with cash to pay $9.70 and card user's paying $10. If card users pay the fee to the bank and cash customers don't pay the fee the new system is an improvement over the old system.

Debit-card users don't have the lobbying clout of Walmart and the retail industry.

They can change banks.

Why is this story always about BOA? Because BOA is conducting a publicity stunt. Many other banks and credit unions are not charging for debit card use. This is not a story about the evils of government regulation, it is a publicity stunt by a greedy corporation that doesn't like being held up to public ridicule.

 
At 10/12/2011 9:41 PM, Blogger Ron H. said...

Bill:

"1) interchange fees were not previously based on a competitive market
2) reduced costs will be shared between retailers and consumers, based on price elasticities
"

And you know this to be true...how?

"Other thoughts 1) checks and cash clear at par, even though they are not "free", why should debit be different... "

Merchants benefit from debit and credit card purchases, as consumers are likely to spend more, and pay less attention to prices, than when they pay with cash or check. That they are willing to pay the interchange fees, tells you it's true.

Banks charge merchants - at least they used to - in order to share in that additional income.

 
At 10/12/2011 9:47 PM, Blogger Ron H. said...

ws4: "There's lot of banks and credit unions that don't charge a fee."

Yet

"Why is competition bad?"

It isn't.

"The old system and the new system are both bad. A good system would involve customers paying with cash to pay $9.70 and card user's paying $10. If card users pay the fee to the bank and cash customers don't pay the fee the new system is an improvement over the old system."

Many merchants already charge customers a fee for using a debit card.

 
At 10/12/2011 9:54 PM, Blogger VangelV said...

Question: Why should the government have the power to insert itself in voluntary transactions?

Answer: There is no moral or logical justification for it.

Question: Than why does it?

Answer: Government is the rule of thugs over helpless victims.

This is the dirty little secret that the statists on the left and the right want to hide and this is what the insiders and the party establishment are trying to protect. If voters actually understood what is going on the parasites would find themselves without a host.

 
At 10/12/2011 10:05 PM, OpenID Bill said...

Ron H.:

1) a) Merchants were precluded by contract from charging additional fees for debit, only able to offer "cash discount", b) banks pushed signature debit over PIN debit for higher fees.
2) laws of supply and demand. See http://en.wikipedia.org/wiki/Tax_incidence.

Not to mention the stupidity of debit loyalty programs. While they clearly work from a marketing perspective, they are really a tax on the people who don't participate. Who do you really think pays for the rewards?

Finally marginal and probably average (I don't know for sure) costs for banks are lower for debit than cash and checks. Why shouldn't debit be at least approaching zero?

 
At 10/13/2011 12:07 AM, Blogger juandos said...

"If it frustrates the businesses and their lobbies from dishonest actions, then you have constructed a good law"...

Yet another crystal clear bit of bet logic from the sethstorm...

How can financing another douche nozzle Durbin election campaign be construed as 'good law'?

 
At 10/13/2011 12:49 AM, Blogger Ron H. said...

This comment has been removed by the author.

 
At 10/13/2011 1:02 AM, Blogger Ron H. said...

Bill:

"1) a) Merchants were precluded by contract from charging additional fees for debit, only able to offer "cash discount","

In that case, I'll have to notify the merchants in my area who are charging a fee for card usage. Clearly they don't understand their own contracts. :)

" b) banks pushed signature debit over PIN debit for higher fees."

Not sure why you think this is relevant.

"2) laws of supply and demand. See http://en.wikipedia.org/wiki/Tax_incidence."

Your example of tax incidence is a good one, but doesn't explain this case very well. The "tax" has just been decreased universally, so that merchants can easily lower their prices by that amount with no loss to themselves. Stiff competition will demand it. individual merchants can no more keep any part of this gain than they can individually raise prices without risking losing sales to competitors.

At issue is whether banks can maintain their profits on this part of the business by shifting the charges directly to consumers. If not, then debit cards could become an endangered species.



"Finally marginal and probably average (I don't know for sure) costs for banks are lower for debit than cash and checks. Why shouldn't debit be at least approaching zero?"

As I explained in a previous comment, merchants benefit from card usage, so banks grab a share of that benefit, because they can. They will charge card holders, because they can.

When there is no money to be made in this line of business, it will disappear.

"Free checking" is what banks pay you for the use of your money.

 
At 10/13/2011 8:01 AM, Blogger mike k said...

1) a) Merchants were precluded by contract from charging additional fees for debit, only able to offer "cash discount",...

Did the merchants not voluntarily agree to said contract?

If it was such a bad contract why did the merchants agree to it?

I thought circular logic was the purview of Larry G et al. Sad to see others on this site jumping on that bandwagon.

 
At 10/13/2011 8:45 AM, Blogger Jet Beagle said...

As I have done before, I want to remind everyone who the bad guys are here. We should expect Walmart and the retail industry, the banks, unions, AARP, and every other group to do whatever they can legally to help themselves. The culprit here is not those businesses and organizations acting in their own self-interest. The culprits are the elected officials who are interfering in free markets.

 
At 10/13/2011 8:48 AM, Blogger Larry G said...

just to reiterate - many if not most Credit Unions provide debit cards without fees.

so my question is how/why can Credit Unions operate without these fees while non-Credit Union banks have to charge fees?

 
At 10/13/2011 9:43 AM, Blogger morganovich said...

i agree with jet.

the only way to take special interest influence out of government is to take influence away from government.

once the government is allowed to interfere in markets, influencing them becomes the cheapest path to profits, market share, and market advantage.

corporations face a prisoner's dilemma in such a case.

we all know how that ends.

worse, small companies are at a huge disadvantage to large ones in such a system. they lack the political influence to shape the rules and have far fewer resources to comply with them.

perhaps that is why small business confidence remains so low.

other than earlier in this recession, small business confidence would be at the lowest level recorded since ww2.

if you want to point to a reason the economy can't grow and employment cannot recover, that's it.

big government crushes small business.

http://www.calculatedriskblog.com/2011/09/nfib-small-business-optimism-index.html

 
At 10/13/2011 10:10 AM, Blogger Brian said...

A large retailer like Walmart is able to factor transportation, storage, marketing, and capital expenses in the prices of their products. But somehow they're completely unable to factor interchange fees into those same prices, and instead had to lobby Congress to eliminate those costs?

And wouldn't one expect, in a competitive marketplace like that in which Walmart operates, that prices would now decrease relative to the absent interchange costs that the retailer no longer has to factor into their pricing?

Meanwhile, those of us that pay cash (or use debit cards from someone other than Bank of America) will no longer be footing additional expenses in the form of hidden interchange fees. Sounds like they've eliminated a hidden subsidy to Bank of America customers.

 
At 10/13/2011 11:31 AM, Blogger Ron H. said...

JetBeagle: "As I have done before, I want to remind everyone who the bad guys are here. We should expect Walmart and the retail industry, the banks, unions, AARP, and every other group to do whatever they can legally to help themselves. The culprit here is not those businesses and organizations acting in their own self-interest. The culprits are the elected officials who are interfering in free markets."

You are correct as usual. Thanks for the reminder. :)

 
At 10/13/2011 12:08 PM, Blogger Ron H. said...

Brian: "A large retailer like Walmart is able to factor transportation, storage, marketing, and capital expenses in the prices of their products..."

Every business of every size must consider such expenses.

"...But somehow they're completely unable to factor interchange fees into those same prices, and instead had to lobby Congress to eliminate those costs?"

They have been factoring in those fees all along, just like every other cost of doing business. The new regulation won't eliminate interchange fees, but will limit them. Lobbying for lower interchange rates is no different from asking for lower rent, lower insurance premium, or lower electric rates.

"And wouldn't one expect, in a competitive marketplace like that in which Walmart operates, that prices would now decrease relative to the absent interchange costs that the retailer no longer has to factor into their pricing?"

Perhaps they will.

"Meanwhile, those of us that pay cash (or use debit cards from someone other than Bank of America) will no longer be footing additional expenses in the form of hidden interchange fees. Sounds like they've eliminated a hidden subsidy to Bank of America customers."

Interchange fees are no more hidden, than any other cost of doing business such as property taxes.

As a cash customer, you will continue to subsidize card users, just to a lesser degree. All card issuers charge interchange fees, not just BofA.

Now that this revenue stream has been reduced, you may be charged for your formerly free checking.

All banks will be forced to charge lower rates, not just BofA. The reason BofA is mentioned in the article is because they have announced a plan to charge their cardholders a monthly fee for using their cards.

Did you read the Washington Examiner article?

 
At 10/13/2011 12:41 PM, Blogger Mike said...

Let's just look at real numbers and facts.

Retailers "could" have offered cash discounts. Most (by far) did not. Consumers who pay with cash and checks offset many of those swipes by paying the same prices.

The swipe fees pay for a lot of services (like fraud prevention, ease etc.) and have now been reduced from .40 on average to .20....

The average debit card holder swipes 33 times a month....that extra .20 X 33 is $6.60. BOA still stands to lose $1.60 per month, per holder with a $5 fee.

This is a lose/lose for everybody but the retailers who will not lower their prices by fractional pennies as it will not be noticed or necessary in places like Wal-Mart.

To all who pay no fee from their bank or credit union, enjoy it....for now. I don't think that will be sustainable for them with the infrastructure costs.

 
At 10/13/2011 2:16 PM, Blogger Larry G said...

can anyone explain how the debt card swipe fees compare to credit card swipe fees?

I use a credit card... does that cost the retailer more/less/same as the debit cards?

 
At 10/13/2011 3:06 PM, Blogger Mike said...

Larry,
I think that may be a difficult answer to find because the fees vary wildly...I could be wrong, but I believe that most credit cards are based on percentage of sale. An example as to why there may be no good, standard answer is the fact that I have a hard time at many places because they won't accept my American Express (rate for the retailer is too high).

 
At 10/13/2011 3:11 PM, Blogger Larry G said...

my wife uses the credit union debt card and I use a BOA credit card.

we see no fees on either so the argument about (for instance Walmart) is somewhat esoteric.

If I was using a BOA debit card.. I'd just switch to the credit union debit card or the BOA credit card.

I only mention all of this because I suspect many others will do what we do... and at the end of the day BOA will likely loose debit card users.

no?

 
At 10/13/2011 4:07 PM, Blogger Mike said...

Esoteric it is not. It's the point. Just because BOA is the first to announce fees does not mean they will be the last.

I do agree that they will lose customers at first, but people who want/need the convenience of multi-branch banking will all pay the price of this lobby win by big retail.

In the end, either most people will pay fees or switch to credit cards...however, the switch to credit cards may not permit the widespread use of cashless exchange. How many credit/debit swipe p.o.s. machines did you see (at McDonald's for example) before the debit card? The credit card fees to merchants are too much for many to find purpose and will start creating minimum purchase amounts to use them.

 

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