The Fed’s Christmas Gift: Reduced Fees for Fat-Cat Merchants
by John BerlauOn a snowy Thursday in the nation’s capital – with little more than a week to go until Christmas – the Board of Governors of the Federal Reserve Bank decided once again to play Santa to a select group of businesses that included the world’s wealthiest corporations. And once again, average Americans are going to be footing the bill for this fat cats’ holiday feast served up by the Fed.
The gift the Fed voted to give on Dec. 16 wasn’t free money through more quantitative easing – or whatever new name they have come up with to make inflation sound nice – although that’s probably coming up soon. Rather, under the direction of an amendment to the Dodd-Frank financial “reform” law by Senate Majority Whip Dick Durbin (D-Ill.), the Fed bestowed near-free access to the services of the vast electronic debit card payment system for some of the nation’s wealthiest retailers – with the tab to be paid for by community banks, credit unions and, of course – you the American consumer.
If the Fed’s proposed rule goes through, come next Christmas Wal-Mart, Walgreens, Home Depot and the other retailers who lobbied for this piece of corporate welfare will have even more overstuffed stockings. These and other retailers benefit greatly from consumers using cards, both in increased sales and in protection from the costs of fraud from bad checks and theft of cash, yet they have gone charging to Washington to for a regulatory “free lunch” to allow them to shift the costs of these valuable services to consumers.
In one of those rare moments of politicians acknowledging the true masters whom they serve, Sen. Durbin admitted on the Senate floor that the CEO of Walgreens, headquartered outside of Chicago in his home state, called him to complain that the transaction fees Walgreens pays to process debit and credit cards were “the fourth largest item of cost for their business.” Durbin actually argued that relieving costs of doing business for a company that makes $2 billion in annual profits was a reason for support price controls on what they pay for financial services.
But the Fed even exceeded Durbin’s order, filling the wish lists of Walgreens and other merchants while giving their customers several lumps of coal. Next holiday season, even if they are not paying vastly inflated prices for the goods they buy due to quantitative easing, American consumers will be losing their free checking, seeing the return of annual fees, and getting significantly reduced reward points for the purchases they make with plastic.
Under the proposed rule the Fed put forward for regulation of interchange fees – the fees card issuers charge retailers to process debit card transactions – merchants will never pay more than 12 cents for any customer’s transactions, whether it’s for $1.00 or $10,000. This goes far beyond the even the language of pro-retailer Durbin Amendment, which required the Fed to “establish standards” to assess whether interchange fees were “reasonable and proportional to the cost,” but did not specify what these fees should be.
According to the Associated Press, the Fed said that average interchange fees in 2009 ranged from 44 to 56 cents. This means that the 12-cent cap will cause a 70 to 90 percent drop in revenues for the banks and credit unions that issue debit cards. And By the Fed’s own admission, this will not come close covering the cost of processing debit card transactions, let alone allow the banks and credit unions to make a profit from what they charge retailers for the valuable services of electronic payments.
The rule states that card issuers will only be able to recover what the Fed deems to be “allowable costs.” Among the costs that are not “allowable,” according to the Fed, are fixed costs of computers and software, the cost of distributing debit cards, and employee costs for “responding to certain customer service inquiries.” Banks and credit unions can charge merchants a small fee hike for the cost to combat debit card fraud, but only under the strictest of conditions.
According to Professor Richard Epstein, a constitutional law and property rights expert on the faculty of the University of Chicago Law School, this rule is the first price control scheme in U.S. history in which businesses, by design, were required to price below product’s cost. He says in an interview that even under the gasoline price caps of the ‘70s, “no one was asked to sell below cost.”
And this is not only horrible policy; it also likely crosses a constitutional line. As argued by a lawsuit challenging the Durbin Amendment from Minneapolis’ TCF National Bank, on which Epstein is serving as an attorney, the fee controls likely violate both the Due Process and Takings Clauses of the 5th Amendment because they deprive banks and credit unions that issue cards of their property rights to a return on capital invested. The Supreme Court in its 1989 case Duquense Light Co v. Barasch, affirmed that a government-set “rate is too low if it is so unjust as to destroy the value of the property for all the purposes for which it was acquired.”
But according to the Fed, the 12-cent cap creates “an incentive to control costs.” And besides, the Fed points out, “the interchange fee standard would not limit the ability of an issuer to earn revenue from other sources, such as by charging fees to its cardholders.”
And indeed, consumers have already been paying for the anticipated costs of the Durbin Amendment. “Free checking as we know it is ending,” reported the lead paragraph of an Associated Press story in October, and the article listed one of the main reasons as “the new regulations limit fees the bank can collect when retailers accept debit cards.”
If Australia’s experience in capping interchange fees for credit cards in 2003 is any guide, the vanishing of free checking could be just the beginning. As George Mason University law professor Todd Zywicki noted in the Wall Street Journal, “Annual fees increased an average of 22% on standard credit cards and annual fees for rewards cards increased by 47%-77%. Card issuers also reduced the generosity of their reward programs by 23%.” And last year, a study by the Government Accountability Office of the U.S. Congress found no “conclusive evidence” that any of the Aussie retailers’ $1.1 billion in savings had been passed on to consumers.
The good news is there are efforts underway in Congress to delay or repeal the Durbin Amendment, and even some Democrat Dodd-Frank supporters have pulled back, correctly perceiving that this measure and the Fed rule implementing it make a mockery of their claim that Dodd-Frank was a victory for consumers over special interests. Even soon-to-be former House Financial Services Committee Chairman Barney Frank (D-Mass.), criticized the Fed on CNBC for setting the fees “too low.”
But the Tea Party movement also has to watch the GOP on this issue, including some in Congress they may normally count as their own. 17 Republicans voted for the Durbin Amendment in the Senate last May, including some ostensible conservatives who would oppose price controls in most other contexts. Georgia Sens. Johnny Isakson and Saxby Chambliss voted aye, for instance, after heavy lobbying from Atlanta-based Home Depot, a firm that American Banker described as “on the warpath” against interchange fees . (The full list of which senators were naughty or nice on their votes on the Durbin Amendment is here.)
Conservatives are often sympathetic to retailers and with good reason. They are hit with the taxes and regulations of Big Government and threatened with threatened with coercive measures from Congress such as union “card check.” Yet when the leaders of their industry lobby for price controls, we must say in unison, “No sale!” This is what several groups in the Center-Right Coalition – from CEI and American for Tax Reform to Phyllis Schlafly’s Eagle Forum – have already done in a letter last summer.
The Fed is taking comments on the rule through Feb. 22, and you can send them your thoughts at regs.comments@federalreserve.gov. Or go here and follow the instructions for submitting comments. If you wish to share your views on whether Congress should repeal the Durbin Amendment’s price controls, or delay the date the Fed implement them, you can e-mail your members of Congress or call them through the general number of (202) 224-3121.
Meanwhile, it wouldn’t hurt to have some Tea Parties in front of your neighborhood Walgreens and Home Depot communicating that if they want you to shop in their stores, they’ll have to stop lobbying to take away your free checking and card rewards!
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108 Comments
Corporations running the Government, or the other way 'round. Doesn't matter in the end.
Why do all the hippies and anti-establishment fools vote for Democrats again?
I thought they said it was the right that did this stuff?
The banks used to charge the retailers for this "swipe fee" service, they used the same argument already in the banking regulation bill when they touted it as an end of "swipe fees", and it would save the consumer 5-7% on every transaction. I remember at that time consumers were being warned that the fees would get passed on to the consumers eventually, well it didn't take long now did it.
Now the service stations and WalMarts will get paid a fee from the consumer in place of being charged a fee by the banks.
Correct me if I'm wrong, wasn't Turbin the loudest critic of the extension of our current tax rates to millionaires? so breaks for $billionaires? OK. Millionaires? not OK.
It's really hard to figure out these Progressive Demo Rats.
But in the end the costs of the retailer is getting transferred to the consumer. Now that's financial reform!
Why bash hippies?? Hippies are the ones who fought against government/corporations, brought in the womens movement–Bra Burning, and civil rights. Hippies are for freedom from government controls.
The hippie movement was not a progressive movement, it was a smaller government individual freedom movement, much like the Tea Party– which I would imagine is packed full of old hippies. We were "right on" then and we are "right on today" –the government was the problem and still is, only larger and more so.
Piece brother.
In truth that was said half sarcastically, I should have tagged it.
That really is my point – you said it better than I did, but if you ask today's 'hippies and anti-establishment' types what you are most likely to hear is that they support the left, big government.
And didn't a lot of those old hippies go into academia and the like (e..g., Bill Ayers).
Kill your TV man!
"Communism doesn't work because people like to own stuff." – Frank Zappa
Just remember walmart loves for their products to be made in china.
I shopped at Walgreens before. Didn't like it there, and now I know why.
I don't think that's true, they love to be able to make a profit, that is to get things cheap. I doubt they care if the product comes from China.
You don't believe that is wrong do you?
Does this not form the basis of an indictment of the entire Federal Reserve System? Whether it is quantitative easing, backdoor loans to favored insiders without any oversight or taxpayer approval or collusion at the expense of everyone but the commercial banking system, all of it spells a pretty damning piece of evidence against the Federal Reserve System Act of 1913.
While records are not great, in the century preceding the enactment of the Federal Reserve Act of 1913 there were 24 banking system failures, panics or bank-induced recessions. The Federal Reserve System Act of 1913 was sold to the public by the banking industry as the means to end these panics. Since it's enactment there have been 20 bank-related recessions, depressions, failures or panics.
Is this not the evidence that speaks to a new way forward? Should we not at least consider alternatives?
There can't be any large-scale revolution until there's a personal revolution, on an individual level. It's got to happen inside first.
-Jim Morrison
STOP spending our money before we force you to stop! Is the FED committing treason??
Don't worry Dick Durbin,.this will never see the light of day,……….
you just keep on pretending you are fighting for the little guy,………
ya got em well bullshitted.
Piece, brother.
Profits are the American way. What isnt American is to make as much profit as possible, be damned the consquence. WalMart shipped an entire fish processing faciltiy from the US side of the border to the Mexican side so that they didnt have to follow US regs on proper disposal of waste, ie fishheads and oils used in the canning process. In Mexico they can just dump it into the ocean.
You believe that is wrong, don't you?
Actually, speaking as a person who was raised by hippies, they were for social justice and the government getting out of their business (as in if I am doing something illegal, zip it). They want to be supported and tell others how to live because they know best. They see injustice in every face except their own.
The majority of people I know who identified with the 'hippy' movement voted for Obama and continue to support him. They were against big government, so long as it was a government that didn't give them what they wanted.
I know of a few who don't trust Obama any more than they ever trusted any other President. I guess they are the ones who 'kept the faith', so to speak, and you are correct that they either refuse to have anything to do with politics or they now tacitly approve of the Tea Party movement; but the rest of them think Obama is the greatest thing since sliced bread (so long as it's not white bread, of course).
The sentiments of the hippy movement represented a true paradox! I think many who called themselves 'hippies' were not so much anti-big government as anti-capitalist.
Is there a place on earth not in favor of profits?
Maquiladoras are primarily set up to exploit cheap labor.
Look all around the world, America and the companies that are based here are far more "consequences" of their actions than they are anywhere else.
Yes.. reduced fees to anyone and any company that is progressive and gives money to their re-election. It's incestuous.
Here is what this all boils down to. The dems hate the banks more than they hate big business. They have taken away the fees they big retailers pay and have pushed those costs back to the bank. THEY SAY they are doing this so that retailers can then pass those savings on to customers. THEY SAY that the banks will find the savings within their own structure and absorb the cost. THEY SAY that they are doing this for the little man. That they are looking out for us.
YOU KNOW they are completely corrupt and they are doing the exact opposite of this.
the stockings are stuffed…
I hope there is a whole army of attack lawsnakes penned up in a cage somewhere ready for release to overturn this disaster. Damn what a mockery!
Of course, and this is my point.
Is this the free market? No. We are constrained by our society in ways that other countries are not.
But the simple fact of profit seeking is itself not an evil, it is good.
I think you are confusing capitalism with materialism.
Some hippies turned to the radical left, but the rest of us, the majority I would hope, remained liberals–todays libertarian.
Wrong. Go back to being a hippie.
Nobody credible claimed 5-7% would be the savings on swipe fees. You were mislead, probably because of what you choose to read.
This article is an extension of the hilarious "bail out of BP" arguement.
The Durbin amendment, a no-brainer for all but the Breitbart cognescenti. I remember it each time I go to the gas station where, because they no longer can be strong-armed by the credit card co's into not advertising "discounts for cash", I get a nice discount for cash, or debit. Thank you, Dick, Dodd, Frank and make that about 19 Republican Senators. As usual, the extreme Breitbart chorus goes foul enjoying one of the most egregious examples of anti-competitive practices in American history.
The card companies are an example of one of the least competitively capitalistic and most opportunistically oligopolistic price makers that ever existed. They innovate nothing. They take from those who work and risk to operate business and give to that faceless shareholder who sits there, doing nothing, someplace where they couldn't care less about the average American.
Anti-competitive. Does it mean anything to this crowd?
Maybe you're right. I'm going by personal experience only. I live in a city that is well-known as a 'retreat' for a great many hippies who left California. Most of them drive beat-up subarus with 'Obama' bumper-stickers….apart from the ones who are trust-fund babies; they drive mercedes SUVs with 'Obama' bumper-stickers.
I think what it comes down to is that there were 'hippies' and then there were those who associated themselves with the hippy movement, but had a political agenda all along.
50-70 cents on every transaction, my bad, many times the percentage would be much higher.
Thanks for pointing out the error.
Of course, Visa and MasterCard are also virtual monopolies as the same banks generally sit on each other’s boards and they operate in a fairly non-competitive environment. American Express and Discovery are not large enough to offer a serious alternative. They can dictate fees to business (small businesses as well as Wal-Mart) and basically say if you don’t like it you don’t have to offer credit. How realistic is that in today’s consumer environment? And if you try to offer a lower cash only price they have had contractual blocks that limit that as well.
I work in the trade press and have covered credit fees as a major issue in the petroleum retailing and convenience industry for a number of years and have interviewed VPs at the credit associations as well as numerous petroleum marketers and retailers.
(Cont.)
The author (and his organization) takes the side of the major corporate financial industry over small business and consumers. I have heard the credit associations are throwing a ton of cash around now trying to make this go away. Virtually all gas stations are operated by small business franchisors (marketers and dealers) for whom gasoline is more of a traffic driver to the store and car wash than a profit center these days. They are not big oil. They typically make less than 10 cents on the gallon in profit at the retail end and it is not uncommon for Visa or MasterCard to be making as much or more per gallon off of that transaction. If they get relief most of that will be passed along to consumers because it is a highly price competitive industry at retail.
(Cont.)
Now, personally I’m more of a free market guy and not typically a big fan of Dick Durbin but in this case there were few choices. A better choice might be an FTC investigation to look at the fairly convincing monopoly powers these organizations posses. However the credit associations have too much power in Washington to allow that to move forward.
BTW, those premium rewards and free checking etc. are not free – merchants carry that freight with their transaction fees and you pay for it to some degree with every purchase – cash or credit.
Keith Reid
"there were those who associated themselves with the hippy movement, but had a political agenda all along."
Bingo! Progressives, communist, socialist, and those that have been co-opted by them, like the Democratic party.
End the FED. And could we find a few honest people in Illinois to end Durbin?
Once this rule goes through, banks will not only increase our fees, but they'll start charging us for EVERY credit/debit card transaction–not just for cash withdrawals. Should be fun and educational.
Actually the problem is the regulations Fish watse here and everywhere else in the world use to be converted to animal feed fertilizers. I doubt Mexico is dumping such a valuable protein and nitrate resource in the ocean but, what if they did? What could be a more appropriate disposal then fish food? I guess I don't understand your outrage
Sorry, the answer to your question is, "Doubtful".
Get your head out of your arse. One bad regulation replacing another bad regulation doesn't make sense. The only way a retailer will not offer discounts for cash is if they are regulated. Take away ALL regulation of transaction and the market forces will find the solution. The regulators now are simply trying to put small banks and credit unions out of business so there cronies BofA, Chase, Ing, etc. can have the game to themselves. If you don't beleive me go to a local bank one with 10 or less locations and ask them how the banking bill is affecting them.
Ok, I do business with Wal-Mar, Walgreens, my local restaurant. They pass their costs on to me, it doesn't matter if it is the cost of labor or a swipe fee. The only thing I see that this bill does is keep the difference in profit between cash and credit about the same. It helps the consumer who pays in case by reducing the overhead that the business pays to use credit cards.
As far as it causing an increase in fees etc by the banks, absolute nonsense. They are raising the fees anyway because they can.
Keith you are so right. As a small business owner I calculate the cost of my credit card fees as one of my big bill, and I spread the love around when considering a price per transaction. I cringe when someone hands me a rewards card because of the fees attached to it. Why should I be forced to pay for your ten millionth mile when I had no hand in negotiating that contract? At this point I have no way to vote with my business because there are legal protections for what I will be charged. Unfortunately, I have to spread the cost of that around to all of my customers, and I make sure that I come out on the winning end. If I had the option, I would charge a fee for credit card use. Why should my cash customers pay for a convenience for credit customers (and let me assure you that they do)? Because I am the only shop of my kind I could do that. Of course, if another paintball field opened next door, I may offer "no credit card fees" as an incentive to come to my field. It's how the system, when left to function correctly, works. Why do the credit card companies get special protections? I am willing to pay a fair price on an even playing field, but all these false constructs under the guise of fairness have ruined it for everyone but the big banks and credit card companies. I hate this, and I proudly consider myself a blood-sucking capitalist.
Ayn Rand called Libertarians "hippies of the right", then she describes Libertarians as anarchist, a description that I think is pretty harsh but hey who I am to argue with Ayn Rand. I am a Libertarian in the mold of the founding fathers, at least I try to be.
…
I am a die hard Republican, but I own a very small business and I am glad to see this part of the bill passed. My credit card swipe fees cost me 50 thousand dollars a year. Why should I be punished because someone wants to use plastic instead of cash? Most of my sales are gasoline, which I average about 8 cents a gallon, my swipe fees average 2% so at $3 per gallon the credit card company makes 6 cents a gallon and I make 2 cents per gallon. I bear all costs of equipment upkeep, electricity to run the equipment, and I have to pay salaries. What costs do the credit card company have to bear? Their no better than the govt. Their just a bunch of thieves! Small business is the backbone of this country John Berlau, so your wrong on this one bud! If the consumer chooses to use plastic, including myself, then they should bear the swipe fees, and the banks shouldn't be allowed to profit 40 billion dollars per year from swipe fees!
Really, a business does not have to take credit, aah but the business benefits from credit, they just want price fix legislation, if I benefit from your business should I demand you sell me a certain item for a certain price and make it the way I want?
Anti-competitive, nobody is forcing businesses to take credit, many businesses did not take credit 30 years ago.
Well, nobody is forcing business to take credit if retailers and businesses benefit from it they should pay the fair market price for it. Costco only takes Amex, many businesses are still cash only, retailers and small businesses want to have "their cake" and eat it too.
No, the gas station can stop taking credit, many of course do give a cash discount since federal law requires it, since a person is not likely to fill up or spend more at the gas station since his or her credit line allows it , surcharging is basically gouging. Many gas stations discount exceeds the cost of the fee and benefits.
The free market is a market, so you say there is no competition in credit, well that is not because they are monopolies , simply put competitors are not offering the service demanded to compete, if 10 companies fail to compete with a successful company that is not reason that the successful company should get punishment.
You are also dead wrong, the federal government has been hounding the credit card companies for decades.
Walmart and walgreens do not have to take credit, do they pass on your costs to you, yes, but not necessarily the savings, increased in fees are a different issue, it is true that they can have fees regardless of the issue just like retailers pass fees and lie about swipe fees.
If a customer is paying you more because he or she is using credit, then you are not being punished you are simply a person who thinks you live an entitlement society, small business is not the backbone of this country , contrary to what Obama and his allies want you to think as growth in new jobs are not really the result of them , see the article about Small firms' job-growth role may be overstated . Also, fraud costs, and if a person steals your card and visits your gas station you will still be paid are there, by the way if you complain about the $40 billion in fees, should I pass a law limiting your profit margin? Are armored car services fee? Unless you don't pay tax on all your income , why need cash then?
Somewhat true, credit companies do have laws that allow a discount because of federal law requiring and allowing them to give a discount for cash. Interchange fees are a lifeline for mom and pop community banks more so than the larger financial institutions.
I might be movin' to Montana soon
Just to raise me up a crop of
Dental Floss
Raisin' it up
Waxen it down
In a little white box
That I can sell uptown
By myself I wouldn't
Have no boss,
But I'd be raisin' my lonely
Dental Floss
"Why do the credit card companies get special protections?"
Rhetorical question of course.
Have you ever taken Barney Frank to lunch?
Yeech.
It's a fact that ALL taxes and fees are paid by the consumer. If you ever receive anything for "free" it's because you either don't see the fee (it's rolled over into the cost of the product), it's spread out and everyone else is paying a bit for your "free" item, or you've already paid for it earlier by being overcharged.
This article talks about this bill like it's horrible because it institutes price controls for fees. There are no such thing as price controls for fees, if a product or service costs a certain amount of money to produce then those costs get passed on to the consumer. If certain fees are held artificially low, somewhere else along the line the consumer will be charged for it.
This bill is a bad idea for the following reason…The banking industry SAVED billions a year when people started using plastic and they've been playing the fee game ever since to boost their profits. It costs them nearly nothing to process a card transaction. The worst thing that could happen to the banking industry is if people stopped using cards and went back to checking accounts. When I read the article one thing that leaps out is the threat of stopping "free" checking accounts. "Free" checking accounts encourage people to own and use a checking account, something the banking industry is very much against. They would much rather have you use the card that costs them next to nothing instead of having to process handwritten physical slips of paper. If they can somehow blame the government for causing checking accounts to disappear so much the better. Follow the money on this bill and I'm sure you'll come to the banking industry.
So what you're saying is you make one quarter of the profits you ordinarily would because of swipe fees. Would you lose three quarters of your customers if you stopped accepting plastic? If you wouldn't, the solution is to stop accepting plastic. If you would, then you'd have to think of other solutions. For instance, stop accepting plastic and allow a bank to put an ATM in. In that case all the fees would be carried by the customer and you'd probably make a bit off of the ATM fees.
My point is, there's always an alternative solution to more governmental regulation. Asking for more government is just asking for more trouble.
F-this (and others),
"What costs do the credit card companies have to bear?" First of all, it's the institutions issuing the card — including community banks and credit unions — that bear most of the costs. Visa and MasterCard are the payment networks they belong to. And the costs can be immense for processing millions of transactions in nanoseconds, while protecting the system (and you as a merchant) against fraud or hacking attempts. Remember Wikileaks' Operation Payback just a couple weeks ago when consumers and merchants were on edge that electronic commerce would come to a halt?! Nothing happened fortunately, but this incident shows that a sophisticated electronic payments system requires maintenance and upkeep, and someone has to pay the piper. Before this system was created, retailers bore much more of the risk of theft of cash laying around and fraud from bad checks.
If you really feel you are being "punished" by consumers who use plastic, you can always offer a cash discount. Many stations near where I live in Virginia do this, and contrary to CogWheeler, always had this option long before Dodd-Frank and the Durbin Amendment were passed. Or if you are a franchisee of a chain like Shell, you can offer a co-branded card and pay less interchange, but you would have to pass on some of these savings to your customer. If none of these choices satisfy you, you always have the option to go to go cash-only. Obviously, you feel you are gaining more than losing by accepting debit and credit cards, or you just wouldn't take them.
Payment cards systems are not a monopoly. At many gas stations in Northern Virginia, for instance, more than 12 different credit and debit card systems have their logos at the pump. But even if they were were determined to fall into the category of "natural monopoly," like a utility, it would still not be acceptable to force them to price below cost, as the unprecedented Durbin Amendment and Fed rule do. As Professor Epstein argues on behalf of TCF Bank, such a rule deprives an entrepreneur the property right to a return on capital invested.
Small merchants are part of the backbone of this country, but so are their customers, as well as the community banks and credit unions that lend money to start small businesses. Neither a small retailer nor Walgreens should get a get a government-guaranteed "free lunch" at the expense of consumers and other businesses.
Sorry but this "…the costs can be immense…" is simply wrong. Yes it would be expensive for you or I to do such a thing. But we're not talking about you or I, we're talking about the banking industry. They save billions a year by promoting the use of plastic over checks because the processing costs are so tremendously low. Really stop and think about it for a minute. You (the bank) can process a packet of encrypted data over a robust secure network that's already been paid for by the people, you use no humans to process this transaction and payments come in and out in less than a second. Or you can hire a team of humans to sit and process hand written slips of paper by reading what is written and entering it into a computer, payments take days to process, you've got to dispose of all the checks after you're done etc. etc. Plastic's the way to go every time. Consumers constantly over estimate the costs associated with business. As an example, many years ago someone did a study of a well known pizza chain and found that every ten dollar pizza sold cost the chain fifty cents to produce. That's fifty cents TOTAL, personnel, electricity, leasing fees, franchise fee, EVERYTHING. Who in their right mind would pay 10 dollars for a 50 cent pizza? I'll tell you who, people who grossly overestimate the cost of business. You see it all the time in stores today. You think jeans cost anywhere near forty dollars to make? They're made of denim, a super cheap material! They probably cost somewhere near two to three dollars to manufacture. But the price is the price because that's what the market will bear and I don't begrudge them that. I just can't stand people crying for big business like they're barely scraping by.
As for your comment about the "free lunch" at the expense of consumers this is simply ridiculous. Consumers pay ALL taxes and fees.
(Cost to produce good)+(profit)=Cost to consumer every single time. Part of the cost might be fees, taxes, bureaucracy, legal fees, personnel, material etc. but all costs are ultimately borne by the consumer. Profit is a function of the risk associated with that business. In order to attract investors those businesses must make a profit commensurate with the risks. If a business is forced to lower their profit, they must either deceive their investors about the risk or go out of business due to investors leaving. We saw this in action in the recent housing collapse. Government regulation forced mortgagors to deceive the buyers about the risk associated with the sub-prime mortgages they were bundling. We had bundles on the market with the highest ratings that were really nearly worthless due to the risk involved. I think we all know how well that turned out.
The rest of your post is spot on, there's always alternatives if you don't like what's being charged. No one's forcing anyone to accept plastic. Just don't do it and you won't have to worry about the (grossly inflated) fees.
He should pay me just to sit through it.
The same way they hounded Freddie and Fannie? They only hound when it comes to lining their own pocketbooks or PACs.
Dude, you have no clue about the cost of manufacturing, and apparently have no clue of the EXISTENCE of many other costs. And, just as a personal note for the Pizza thing, I call you a bald-faced liar, and dare you to show me that study. I constantly did that math as a manager of a store in a four-store chain, and our costs were in line with any other fast food place, roughly 34-38 percent food costs alone. Anything outside those margins, or the same type of percentages for labor and store maintenance (my third biggest cost), and we were losing money. A ten dollar pizza cost roughly seven dollars to make, by the time you figure in the labor of the cook, the waitress, the manager, and the daily prep cook, as well as the costs of the lights, security system, building/land costs/taxes, etc. And that calculation is based on averaging so many pizzas over the month. Fewer sold, more overhead per pizza. There were no 'swipe fees' then, we didn't take checks because of the enormous cost (not in teams of people sitting around looking at slips of paper….sheeeesh, what world do you live in?) but in terms of fraudulent checks not being collected. Credit card transactions cost very little, it's mostly electronic, and while there's a cost associated with it, it's nowhere near the cost of human interaction required for cash or checks. You might be out a buck or so on the swipe fee, but when the check bounces, you're out the whole forty or fifty bucks.
The real problem here is that we should all be using cash, and anything else is convenient for both us AND the merchant. Those using cards should pay for them with a fee, otherwise, items should sell the same for cash or credit because then the merchant doesn't have to discriminate. The swipe fees should be outlawed, the card issuer/backer collects a fee annually, and that's that. On the other hand, the government has totally failed to manage our currency. I should be able to get paid and get my money in cash, every penny. Right now, there's no way to get your money without paying someone something to get it. That's the first thing congress needs to fix concerning this issue.
You can call me a bald faced liar all you want, I read the study not on the internet but (gasp) actually in print!! It was so long ago I doubt it can be found on the internet. In any case manufacturing costs ARE nowhere near what the customer winds up paying. You don't have to read a study to confirm this either, you see it around you all the time. Items sold on T.V. will, after a time, offer you twice as much for the same price! Well logically they're making a profit even when they double your order, so when they were selling only one for $19.95 they must have been making a bundle! Either that or somehow they were able to halve their manufacturing costs with some innovative new technology. Which do you think is more likely? This isn't the only example, only one of the more obvious ones.
"…not in teams of people sitting around looking at slips of paper….sheeeesh, what world do you live in?…"
I would ask you the same thing, what world do you live in? Every check ever written has to be handled by a person (often several) at the bank and entered manually in a computer. The end result (country wide) is a ton of actual people having to handle your check, people cost money to hire, thus the processing costs of a check is many, many times that of plastic. You even acknowledge this when you say "…it's nowhere near the cost of human interaction required for cash or checks. " So what are you complaining about? We apparently agree that plastic processing is tremendously cheaper than check processing.
Your second paragraph contains a bunch of governmental intervention. For instance "The swipe fees should be outlawed…". Really? You want the government to come roaring in and start setting the prices charged for goods and services? That's what you're asking for, just not in those words. Anything less and this idea doesn't work. If the government outlaws the swipe fees and the market risk outweighs the gain the banks will simply find another way to charge the consumer. If the government clamps down totally and starts setting prices that ignore the market risk the system will collapse. Either it doesn't work (banks find a different way to charge the consumer the same amount) or it collapses. Even your idea that "…we should all be using cash…" could potentially negatively affect the market. Stores with lots of cash on hand are prime targets for robbery, as are people walking around with lots of cash to make their purchases. Cash would also cost much more than even checks would to process. I know it sounds crazy but think about a business dealing only with cash. They'd have to own, or hire an armored truck + guards to take their cash to their suppliers etc. As many steps as a manufactured good takes before it actually gets to the consumer the overhead would be ludicrous.
Overall I'd have to say the whole theme of your post seems to be summed up in your contradictory statement "…the government has totally failed to manage our currency.". This is the sort of statement I'd expect to see on HuffPo or MMfA not on one of the Big sites. If it's our currency, why would we want the government to manage it? I don't want the government to manage anything of mine. I want it to do what it was formed to do, protect my rights and nothing else. I'll manage my own affairs.
I'm a believer in capitalism.. Any breaks the fat cat merchants get are ultimately passed on to the consumer. I'm for it!
I believe that it is evil when you sell your own people out to save a penny. Walmart bullied companies to move to china that didn't want to move so that they could make a little more profit. Now we have massive unemployment and a federal budget that is about to implode.
Do you believe that is wrong? Or perhaps you prefer economic meltdown and massive unrest as the country spirals into self destruction? Perhaps you believe we should send more jobs to china, as long as a few corporations make a profit that is alright now isn't it? I think your attitude is simplistic and extremely short sighted, but hey what is our nation worth after all? I am starting to think we shall reap what we sow and it will be justice, will it not?
Perhaps another nafta will do the trick. We will open our markets to others that will never respond in kind and when our people are impoverished we will call it free markets and capitalism and blame those two concepts for our troubles, will we not? Then we will create more socialism and tyranny and pretent it is capitalism and mess things up more, will we not?
You are wrong in that they did want these companies to move to chine. They bullied many of them and threatened to buy from others if they did not move their facilities to china. Walmart actively forced many companies to move to china at the expense of the American people.
I have a feeling that you will accept this as normal and righteous behavior. The love of money is the root of all evil.
First off NO procesing company charges 5-7%. I have worked this field for over 16 years. The highest most pay are 3%. Debit card transactions are normally a per item fee regardless of whether it is for a dollar all the way up to a million dollars. Most are around 10 cents a transaction, and a monthly fee of around $10 for the servive per month. In the long run the Debit transactions cost much less than the percentage charged for regular Credit Card transactions.
So as normal Dick Turbin has no clue what he is talking about and Chain stores normally pay half of what a regular Mom and Pop store is charged.
The dems claim to hate big business but they sure love the donations they receive from them. … which probably explains why they pass laws that supposedly "punish" big business but in reality only hurt small businesses.
JohnB, retailers still pay for fraud, or do charge backs no longer exist? As one fuel marketer told me recently: “I gave the credit card associations $4 million last year supposedly to cover fraud and they still hit me with charge backs.”
And you note some retailers have offered a "cash only" price even before this legislation clarified the issue. But then why did the legislation include such provisions? Because going that route was a huge challenge to retailers, with numerous (and often costly) hoops to jump through to offer a discount for cash.
(Cont.)
And you state: “If none of these choices satisfy you, you always have the option to go to go cash-only.” Of course, if the alternative to not taking them is going out of business then that is not much of a choice. “Cash only” only works in some specific market demographics and specific retail segments.
As far as the monopoly status is concerned, Visa and MasterCard hold about 75 percent of the credit market. The same banks tend to sit on both associations’ boards. Has anyone reading this ever seen an advertisement where Visa said – “We’re superior to MasterCard because…” No, you see positive advertising promoting some specific bank’s signature product and half the time you would be hard pressed to remember if the product carried the Visa or MasterCard brand: CapitalOne… Vikings… Funny… (Visa or MasterCard?)
(Cont.)
And then you say: "Neither a small retailer nor Walgreens should get a get a government-guaranteed "free lunch" at the expense of consumers and other businesses."
You mean like the free lunch the banks got from the taxpayers after TARP? In fact, the big issue has been tackling the more onerous credit fees and not necessarily debit fees — but that was a total non-starter. Visa and MC (and their banks, of course) are the Goliath in Washington, and the merchants — including “giants” like Wal-Mart — are at best fairly weak Davids.
And I’d really like to see the accounting on how these $Trillion companies are underwater because of this. It must be Hollywood accounting where a movie can gross over a half billion dollars yet still show a loss once the accountants are done.
Keith Reid
It also sounds you have an entitlement society that someone a dishwasher or a teller should make 100k a year or that bill gates does not earn any money, the card companies have competitors all the time not just in credit but also different payment methods, failure of other companies to innovate or lack success is not necessarily evil.
Keith , get your facts straight, card present transaction liability falls on the bank. Retailers have had the choice of offering a cash discount for years, just as gas stations, utilities, and gun shops.
30 years ago many retailers did not take credit, visa and MasterCard or associations in the credit market, failure to innovate or not offer a free market solution is not reason to rant and pant. Many businesses refuse to take amex and discover because they do not like them, so it it the small business's fault , I guess so right Keith, they do compete with each other although the board is the truth. What you are saying is entitlement, I can benefit from a product or service but I don't want to pay that particular price so I call in the government.
Keith, Tarp has largely been paid back with profit , you state visa and mc are goliaths and not walmart also visa and mastercard are associations they never received any bailout many, get your facts straight instead of rhetoric about evil banks and weak victimized retailers.
Not true look at Australia
Carry cash like an adult, and you won't pay 4% more for goods for a 1% return through rewards.
Where do you get this? What is it about the language of "reasonable and proportional" that makes you think Dodd-Frank gave the card co's even more leverage to screw people? Yes, sure, they will increase fees for checking and some other banking services, but that is the way business is supposed to work. No free lunch.
Another example of robbing poor Paul to give average, or well-off, Peter a free checking account was overdraft fees. If I put $25,000 in a separate account, BOA would forgive me, or my SO, for all overdrafts, or inter-account transfer fees. Was it fair, or reasonable, that someone who can't afford to set aside this sum, should be further beaten down by a $40 fee for every transaction they make in a given day, assuming they make a mistake? People like Spencer Bachus definitely think so.
Not asking if they are wrong, just what's fair?
But why amuse yourself trying to defend the credit card companies? Anti-trust is a tough issue and should be a battle line, IMO, for the tea-party. Dodd-Frank was not a huge entitlement program, even if the Democrats otherwise lean too hard that way. An even greater issue is "too big to fail". There isn't likely to be a solution without government intervention. The economy is far more in jeopardy from their failure than it ever was from ma-Bell, or Standard Oil.
But you were paying ~"4%" more because whatever increase in price the seller had to impose to make back that bank fee, he had to spread across everyone. That's because the card co's would threaten to pull out on any merchant who didn't comply, with "no cash discounts".
Big Government finally stepped in and said "enough!". Sometimes it does work…
According to the National Review, among others, the facts are a bit mixed on the TARP payback. http://www.nationalreview.com/corner/242731/did-t...
Whether Visa or MasterCard got where they are today fairly, unfairly or by accident doesn’t really matter on the ground. They have a sufficiently dominate position and are sufficiently interlocked in governance that there are no free market forces at work today at the merchant end. They are essentially credit utilities. The various retail segments did not go to the government (or the courts as is also the case) as a first choice. The market is so uncompetitive that even companies with the market clout of a Wal-Mart have little more negotiating power than Buds Gas Station or Jane’s Hair Salon where interchange fees are concerned.
Unfortunately, when a consumer pays at the pump there are card present issues. As the Washington Post covered:
"Visa, MasterCard and Discover Card generally guarantee that merchants will be paid the first $75 of a pay-at-the-pump transaction. American Express determines its limits based on the contractual relationship with the companies. But beyond those levels, gas stations are more likely to foot the bill in what are called charge backs if a transaction is bad. "
http://www.washingtonpost.com/wp-dyn/content/arti...
"Retailers have had the choice of offering a cash discount for years, just as gas stations, utilities, and gun shops."
Then why was that covered in the legislation? Discount for cash was always technically possible. I've interviewed markers that worked it (or tried to) a number of times over the years. It was just difficult to apply with the specific requirements of the contracts. To be fair, you also run into issues with local weights and measures relative to signage and in some cases consumer resistance/negative feedback among credit customers.
There is no alternative. 85% of customers pay for gas with plastic. If I don't accept it I go out of business yet the fees are contributing in putting me out of business. I really don't know what the answer is.
Your a dumbass! Without small business there is no country. Small businesses provide more jobs and tax revenue than any corporation! Did you not read my post? The consumer is not paying more for the product because of swipe fees, at least not on gasoline and while I make 2 cents a gallon and the card company makes 6 cents a gallon and bears none of my expenses. If I only sold gas and accepted credit cards, I wouldn't last a month! And of all people I don't believe I am entitled to anything except for what I work for! You must be confusing me with a welfare recipient! Did you not see that the banks cleared 40 billion dollars off of swipe fees last year alone, all on the backs of businesses that accept plastic; I also bear the cost of their fraud efforts as they forced me to upgrade my equipment to a tune of 35 thousand dollars, so if you don't know what your talking about, keep your mouth shut! You must be one of the ones making a fortune off of these fees or don't know shit about owning a business. You already limit my profit margin in all of the excessive taxes I have to pay for your entitlement programs, so I then can't put my money back into the economy. What the f**k are you talking about an armored car service? And yes I do pay taxes on all my income for lazy shitheads that didn't do a damn thing for it.
I agree we shouldn't expect something for nothing. But we'd better be prepared to pay more, period. Banks will re-shift the cost back to the consumer. That's a no-brainer. But I think it'll be much, much worse this time around. The monthly account fees or overdraft charges or credit-card annual fees will go up for sure. No one is questioning that. I'm saying that consumers will soon be charged for EVERY transaction. That, I believe, is going to slow the economy even further. Nothing like a 1%-2% transaction fee to curb impulse buying.
Also, businesses have built the credit/debit processing fees into their pricing. If they end up paying much less for processing, do you really think they are going to lower prices? Or will they pocket some of the savings and pay their shareholders the rest? My guess is the latter.
Sorry buddy, it seems like you're in a tight spot. You are completely wrong however about the cost of swipe fees not being passed on to the consumer. All fees, all taxes, all costs of production are borne by the consumer. You being mad at the banks for swipe fees is the equivalent of a customer being mad because part of the money they pay you goes to pay your electricity bill. It's fundamentally no different except the customer doesn't get a receipt that shows you charged them a nickel for the electricity used to pump their gas.
The price of your gasoline is set by what price customers are willing to pay and the price that surrounding businesses offer (there are others but these 2 are pretty huge). I would guess that all the surrounding businesses are accepting plastic, if they didn't they'd probably lose a good portion of their customers to you. Unless these other businesses have been able to work out a deal lowering their swipe fees your swipe fees are comparable to all the other businesses that sell gas.
Imagine that swipe fees were gone tomorrow, removed completely. You might think that's great because your profit margin just jumped. If you think about it though, swipe fees didn't just disappear from your balance sheet, they disappeared from everyone's. That means the shop down the road is going to lower their prices in order to attract more customers which in turn means you're going to have to lower yours. This puts your profit margin right back where it was.
In short, business is competitive. If you're able to reduce your costs while your opponents cannot you gain an advantage and can enjoy a greater profit margin. Reducing the costs for everyone at the same time does nothing for your profit margin. It might influence how much gas you were able to sell since the price to the consumer would decrease but your profit margin per gallon would remain the same.
Not true, look at debit/credit cards. Using plastic instead of writing a check saves the banking industry billions a year. The banks still charge for their use. Think about it, they actually CHARGE the customer for using something that saves THEM money. The savings sure didn't get passed on to the consumer in that instance did it?
Nope its seems you don't understand the difference between a government sponsored enterprise and an private company
Absolutely agree, we can rant and rave about electrical prices, internet prices, etc and armored car price, aren't armored car companies a "hidden tax" just like "visa and mastercard", surely armored car servicemen and woman take risk but what about the ceos and managers and should they make 100k a year the security guards, talk about free market and entitlement.
If you cannot compete maybe you should not stay in businesses sure blaming the card companies may ease the pain but its not the reason your businesses is suffering in a recession. You do not have to take cards but then the problem would be the banks it would be the competitor if they exist down the street.
Note, I don't have an exact opinion on interchange fees but do reply to hypocritical reasoning.
Maybe, but visa and MC have nothing to with government assistance and tax breaks. Also interchange fees are more of an issue for small community banks and credit unions who stand to lose more money
Not true, take for example american express, if not many consumers used amex or the affluent, a company that raised its prices by the extra merchant discount rate would suffer a loss if their competitor did not take amex.
The New America foundation rebuttal makes sense because usually bankcard users spend more.
True, but you are confusing fraud liability, if you noticed your link goes back to 2008 when gas prices skyrocketed, its easy to blame visa/mc but that wasn't the main issue that led to a crises in the first place.
Visa did lower its interchange gas rate during the price spike.
That supports the argument that retailers or companies with monopoly power are likely to gain the most via discount and surcharging such as in Australia.
The WSJ story on what the Fed decided pointed out that it was 90% of the going rate which was determined to be in excess of "reasonable and proportional to the actual cost". This was the Dodd-Frank/Durbin language that put the Fed to task. As to how much of a percentage of each transaction, I take the "12 cents"of this story to possibly indicate what is left after 90% of the old rate was done away with. So, that points to about $1.20 as the former average debit fee. I have no idea what the average transactino size is, but merchants of small items were some of the loudest complainers.
I think you are right on target with how this all works, but are going the wrong direction with the impact of this Bill. I haven't got a problem paying more for banking services, if it takes banks from preying on customers to serving them. True, even if I personally have to pay more.
As to who is going to pass on costs and who is going to pay shareholders, look at the relative market position of those businesses affected. One's with less competition (mostly banks) will pass costs on. Ones with more competition (retailers) will stand to loose business if they pay shareholders, while the guy next shop lowers prices, gains market share, etc…
The economy is driven by value added for the prices we pay. My view is there wasn't much value added from the debit fee, or other banking, racquets that became part of the 35% of American corporate profits (finance, insur, banking). The activity was a major source of wealth stratification.
FYI, S&P predicts banks won't pass on costs entirely because profits are expected to decline as they establish better capital and give up some of these practices.
My point was if people used cash whenever they could, the merchants wouldn't lose 4% on as many transactions and therefore wouldn't have to raise their prices. Merchants are being extorted by the credit card companies. The CC companies can charge any banking rate because the merchants can't stay in business without taking them. The ball is in the consumer's court.
If you are a small business owner, you'd be more likely to pass on the savings to your customers. But a large corporation with shareholders who expect profit–the biggest bears get fed first. A company like Walgreens can lose customers and still make a profit. Not the kind of profit you or I might be proud to post on our financial report, but profit nonetheless.
Apparently replying to the comment from email doesn't work anymore, I replied not long after your post. Suffice it to say that every argument you offer is socialism. I don't want the government to set rates, I want them out of the business of setting rates. Those rates are there BECAUSE of government regs. It is YOU who argue the interventionist route, not that intervention is bad, just that YOUR version is good, the others are bad.
Get government out of the business of business, it is a biased player.
And you should read US Government for Dummies, maybe, because it is CONGRESS'S JOB TO REGULATE MONEY. It's in that pesky thing called the constitution you wave around.
And stores already use cash. Those expenses are already there. It's the credit/debit cards that required a new network and computer support, etc. Costs are no reason to argue for regs, they are there from natural forces, and can't be regulated out, only increased with every attempt to manipulate them.
Maybe you should study economics for dummies, too.
Oh, and I don't know what PLANET you're on, but they don't do that with checks anymore. That's the old days of Bob Cratchet and sitting over double entry ledger sheets. Checks are rarely touched by human hands again once you deposit them AT THE ATM MACHINE. A little education on your part would go a long way towards not sounding stupid, saying that something is a certain way when it's not, except maybe in Mayberry, with little old lady Alice still doing it the hard way. The rest of the world is in the 20th century, at least, and most of us are way ahead of you, apparently.
I used to manage a pizza restaraunt. Our food costs were roughly 34-38 percent, or we lost money. Overhead, labor, tons of other stuff you don't mention goes into the price of something. But of course, being a socialist, profit is BAD to you. Right off the bat, you lose all credibility when you slam someone making profits.
Frankly, I think the bigger issue will be consumer perceptions and for petroleum retailers the appeal of pay at the pump to customers. Card holders can feel slighted unless the education process shows they are not being punished for using credit but that they are paying the added business cost associated with that convienience. And if gas gets up to $4 per gallon having that much cash on hand to buy a tank full. Though the potential savings would also be front of mind at that point. Even if you can do discount for cash it not an easy decision to make. ACH products etc. linked to loyalty programs are more viable but you still havefairly low adoption rates.
I broadly agree with your general philosophy on the issue. But for me, things change when an entity crosses the boundary of being a monopoly. What tells me that the credit associations have a monopoly is to look at how such things typically work with Wal-Mart. Suppliers fight to get on the shelves because of its market position. The accept some really crappy deals in the process. MasterCard should be offering highly discounted rates for exclusive access to Wal-Mart and for the company’s help in signing up Visa customers to a cobranded Wal-Mart MC. Instead, companies like Wal-Mart and Walgreens have to band together with hundreds of other lesser retail partners to use the courts or legislation. In fact, in a competitive environment a giant like Wal-Mart would be no part of such legislation or the court cases because it would already be advantaged.
Realistically, the move to cash only is not something most mainstream retailers could do in most markets because they would lose business to those companies that accept cash and credit. Target may agree with Wal-Mart’s principled position, but businesses is business. The most effective alternative would be for the numerous retailers and associations fighting this as part of the Merchants Payments Coalition to band together and as a whole refuse to accept credit. But, of course, the FTC would have a field day with that. And unless the credit associations decide out of the goodness of their own hearts to cut rates significantly, it’s hard to see any other alternative but the courts and legislation.
In Any case, Merry Christams and Happy Holidays.
That's the point , if companies are really losing and not benefiting from credit , then going cash only would not make them lose business because in your view the price of goods and services would drop 2-3% giving the cash only business the competitive advantage of lower goods and services.
The Merchant payments coalition doesn't just want lower fees, they want to dictate and mandate acceptance such as no requirements for a monthly sales amount,etc while using deceptive advertising and propaganda, if they were truly honest and sincere they would not have to use it.
If you ever have any rewards credit card which does not cost the merchant more money contrary to what a poster may have told you that is not the way it operates , you will see that "warehouse" or "department stores" or "superstores" do not qualify for additional rewards, this is because stores like walmart and costco and other big retailers probably target for example, pay far lower merchant fee discount rates compared to a mom and pop business. A rewards card is not listed on your interchange table as to the rate you pay, a card can be a visa signature premier and pay less rewards to the consumer then a plain vanilla or platinum card. Bank of America's visa signature cash rewards based cards are less of a reward than many visa platinum and cost the merchant more money to process. So the consumer of course , will not benefit from lower interchange fees but not necessarily benefit from higher interchange fees either since banks can keep the profit to themselves. You also fail to mention the cost of cash such as armor and transportation, this means that walmart and target don't have any need to go cash only since debit holders have the money, if durbin gets his way, it would mean more profit for walmart and target, so the jberlau is correct.
What we have here is a group of companies wanting their cake and eating it too, not just with this issue, but with other issues, I highly doubt the would want to the government price controlling what they sell and wage control their workers pay. I do agree we should regulate ma-Bell or standard oil but not give them favors , many conservatives also fail to realize the tax breaks and subsidies and political dollars from ma bell and standard oil, of course one's rhetoric can be played for example with ethanol and the corn syrup.
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