What happens when government intervenes in the free market, part 9,998

A fee for using debit cards for purchases?

Banks used to charge businesses for each credit/debit transaction, and the transaction rate fluctuated. Timothy Carney explains:

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. Wal-Mart 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.

Alas, all good free market things come to an end in the Age of Obama. That’s illegal now. The idea–as all liberal intentions–was to stick it to someone in favor of some poor, poor constituent. In this case, it was to stiff the banks:

After Sen. Dick Durbin, D-Ill., successfully added his “swipe fee” amendment to last year’s Dodd-Frank financial regulation bill, he promised, “By requiring debit card fees to be reasonable … small businesses and their customers will be able to keep more of their own money.” That was the theory, at least.

Ah, the theory. It’s humorous that after years of government intervention the boobs in charge still can’t accurately predict what the market will do in response. I can. Maybe I should be a Senator, eh? Heh.  To send your proper thank yous to Senator Durbin and Wal-mart lobbyists, a little more: 

As the Federal Reserve prepared its rules setting the maximum per-purchase interchange fee, a Home Depot executive told investors on a conference call “Based on the Fed’s draft regulations, we think the benefit to the Home Depot could be $35 million a year.”

That $35 million Home Depot gain is a $35 million loss for banks and credit-card processors. Their interchange revenue was central to the business model that allowed banks to offer free checking and free debit-card use.

That business model is now illegal, and so Bank of America has switched to the model they find second best. If they can’t make the stores cover the costs of debit cards, make the consumers pay a share. The American Bankers Association calls Bank of America’s $5-a-month charge “the Durbin fee.”

Durbin, needless to say, doesn’t like being blamed for this highly unpopular new fee. He blasted B of A for instituting the fee, calling it “unfair.” Other liberals say B of A is just making excuses for fleecing their customers. But Bank of America was always free to charge a monthly fee to debit card customers. It didn’t because it thought it could get more customers by charging the stores instead.

Debit-card users don’t have the lobbying clout of Wal-Mart and the retail industry. Bank of America customers can’t get together and hire Durbin’s old staffers.

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.

Banks–like Home Depot and Wal-mart–provide a service and employ people. As employers, each entity needs to make money. Why do banks receive the lion’s share of demonization for providing service thereby requiring a profit to, you know, pay employees and fund benefits, rather than Home Depot and Wal-mart? In this case, the retailers win big, and the banks will still get their share of the transaction. We’re the ones who get screwed.

That should be a lesson to liberals, but it won’t sink in–it never does. Business works in favor of the consumer when market forces decide what’s fair, not the government.

UPDATE: Ed Morrissey calls it “deja vu all over again” for those who lived through the 70s.

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4 Responses

  1. Glad to see a quick response to my earlier post

    Do you honestly think anyone will ever buy a cantelope from that farm again?

    One distributor has already been caught, by one of those “useless” food safety inspectors, trying to sell cantaloupes from the bad farm by not putting a place-of-origin sticker on the product. Without regulations and inspectors, bad companies will do anything to sell their products.

    Bank of America – lost $35 million! Wow!

    Bank of America-Countrywide: Worst Deal in History?

    Mortgage-security repurchases, at least $13 billion: In January Bank of America agreed to settle claims that Countrywide had violated certain “representations and warranties” when selling mortgages to Fannie Mae and Freedie Mac. Later, BofA agreed to dole out another $1.6 billion to settle similar claims from bond insurer Assured Guaranty Ltd.

    Then today, BofA announced a sweeping settlement under which it agreed to pay $8.5 billion to settle claims by private investors, including Pimco and BlackRock, that lost money on mortgage-backed securities. Previously, Bank of America estimated the worst-cases losses from mortgage-repurchase demands by private investors at $7 billion to $10 billion.

    You ask the question and attempt to answer it but …

    Why can’t Home Depot just eat that cost? BOA won’t eat it. BOA won’t eat it. They’ll serve it up to customers with a smile.

    So – do you think Home Depot would just “eat it” or would it pass the cost on to customers “with a smile”?

    In the case of Bank of America, it is rather obvious that it wants its clients to pay for the stupidity of BoA’s own corporate leaders. How is that fair?

    • I’ll be the first to implicate stupid decisions by bank leaders if you by extension agree that government policies got ’em into this mess. You can’t talk Countrywide without implicating Fannie and Freddie or the liberals in Congress that empowered the two, who, by the way, should not be in the business of lending to folks who otherwise couldn’t afford it. Notwithstanding skin color.

  2. Business works in favor of the consumer when market forces decide what’s fair, not the government.

    Really? Like the businesses that sold contaminated cantaloupes which have to date killed 16 people. After all, if you don’t have to pay for food safety inspectors you can sell your goods for less.

    Like Goldman Sachs selling financial instruments to large investors even though Goldman Sachs knew they were crap and in fact shorted the very same instruments they were touting as AAA+ to their clients.

    Reality shows us that “market forces” will cause businesses to do anything to make a profit. Without regulation, corporations would be killing lots more people.

    Bank of America is in trouble because its executives made some really bad purchases – Countrywide Financial and Merrill Lynch – now they are desperately trying to save their asses by charging ever larger fees.

    • Dude. Little did I know this would bring out the best in liberal thought. I live in Colorado–the source of the listeria cantelopes. Do you honestly think anyone will ever buy a cantelope from that farm again? And it’s not a matter of selling it for less–these melons went to grocery stores, not just roadside stands. The system in place failed. That’s not a measure of the failure of the free market.

      As for the BOA fees, they’ve now lost what–$35 million from Home Depot alone? And you think the bank should just eat it. Why? Why can’t Home Depot just eat that cost? BOA won’t eat it. They’ll serve it up to customers with a smile.

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