Federal Reserve Conference Pulls In Interchange Cap Skeptics
WASHINGTON — Skeptics dominated a conference on the impact of a proposed cap on debit interchange that was held on the same day Federal Reserve Chairman Ben Bernanke informed Congress that the Fed will miss an April 21 deadline to announce the regulation's final version.
PYMNTS.com sponsored the March 29 conference, titled "The Fed's Proposed Debit Card Regulations: Are They Reasonable and Who Will Win or Lose" for about 100 executives and academics from universities, financial institutions, trade associations, retailers and regulatory bodies.
Bernanke's admission that the Fed would miss the deadline for the rule's final version, even though it came after the conference had ended, appeared to validate many of the participants’ opinions that the rule is a poorly written way to implement a poorly considered statute included in last year’s Dodd-Frank financial reform law.
Todd Zywicki, a professor of law at George Mason University, called the legislation underpinning the rule, the so-called Durbin amendment, "asinine."
"Let’s be clear about this," Zywicki told the participants. "I can walk out of this hotel, take a cab to the airport, buy an airline ticket to Germany, take a cab to a restaurant, have dinner, take a cab back to the airport, purchase another ticket and fly home, all without a penny in my pocket. How is that possible? It is possible because we have created a splendid, electronic payment system that does not rely on currency or checks. But not for Mr. Durbin. Durbin wants to bring back Brinks armored cars and checks and currency and all that insecurity. That's asinine. The Durbin amendment is asinine."
Zywicki was not alone in his opinion, though most of the other critics expressed their opinions less vigorously.
Martin Baily, a former chairman of the President's Council of Economic Advisers during the Clinton administration and an economist at the Brookings Institution, a predominantly liberal Washington think tank, told conference attendees that he and other economists had come to oppose the Federal Reserve's pending regulation, including its likely impact to lead more American consumers back to using checks.
"The Durbin amendment represents a huge step backward for us" he said, away from economic stability, which is away from the financial stability the Dodd-Frank Act was intended to further. "I support Dodd Frank, but I don't support every part of it," he said.
Baily quoted Federal Reserve governors over the last five years that have strongly favored moving the payments system away from cash and checks and onto electronic payments.
He also noted the law would likely adversely affect the small merchants that its supporters most wanted to help. According to economic studies, only about 10% of small merchants take debit cards, but almost all of them have checking accounts that they will likely have to pay more to maintain.
"So for the vast majority of small businesses, this rule presents a double whammy," he said. They don't accept debit cards so they won't see any impact from lower interchange fees, but they also have checking accounts and debit cards so they are going to pay higher fees imposed because of the regulation."
Richard Schmalensee, a long-time economist at the Massachusetts Institute of Technology and a former member of the President's Council of Economic Advisers under Clinton, attacked the debit cap generally but specifically challenged the notion that the Federal Reserve had used care when drafting its initial rule.
Schmalensee told attendees at the conference that it is fairly easy to use basic economics to determine the impacts of a debit interchange cap on consumers or the economy as a whole and suggested that the Federal Reserve's staff should have done more of that analysis.
He walked the attendees through what he called a basic economic analysis of the debit interchange cap's consequences, contending that the economics and economic histories suggest that banks will pass the loss of income from debit cards fairly quickly to consumers, since it is both a big hit to their incomes and they are in a particularly competitive industry. The economics suggest, by contrast, that merchants will not pass through their interchange savings quickly and fully. Some merchants, particularly those with very competitive products or product areas like movie theaters, supermarkets and some other areas, may pass the savings on, but not all and not all the way, he argued.
But not every speaker attacked the rule. An economist who has authored research papers for the Filene Research Institute was one of the leading voices in favor of the proposed debit interchange cap at the meeting.
Adam Levitan, an associate law professor at the Georgetown University Law Center, defended the proposed rule. He downplayed the chances that banks would make up their lost debit interchange income in fees on checking and other products and services.
"That is certainly one possibility," he said, "but there are others. For example, banks could just accept smaller profits."
Levitan argued that since banks are in a very competitive market and were intent on maximizing their profits, they would be unlikely to put fees in place which would make their products less attractive to customers. Instead, he contended, banks would just accept the loss of profits from their debit card programs to continue maximizing their profits from other sources. Levitan was the only speaker at the conference who evaluated the debit interchange cap as an antitrust measure and not as an economic one.
"The Durbin amendment was meant to address a very real antitrust problem," he said. "Was the Durbin amendment the best way to address it? Probably not."