We’ve heard a good deal of chatter the last couple of weeks
over the U.S. District Court’s decision to kill the Fed’s new rules on
interchange. For the uninitiated, interchange is the fee that a bank charges
merchants for authorizing transactions on cards issued by that bank.
In return for the
interchange fee, merchants get assurance that the card is OK, the funds are
available and the merchant is reasonably assured of getting paid for the sale. Sounds
like a good deal to me.
But merchants have always griped that the interchange fees
are too high. For years they’ve heavily lobbied Congress to order banks to
reduce their fees.
Congress dutifully complied by adding §920 of the
Electronic Funds Transfer Act. The Act regulates consumer rights in
electronic payments. §920
authorized the Federal Reserve Board to set debit interchange rates.
Having done its work, Congress handed the pricing issue off
to the Fed to figure out, and went on to less taxing things. Like recess. The
Fed, stuck with the task of micromanaging a business that even some payments
experts don’t understand, in effect capped the interchange rates at a price drastically
lower than market value. But that wasn’t good enough for the merchants. So they
sued the Fed.
On July 30 the court ruled in NACS,
et al. v. Board of Governors of the Federal Reserve System that the Fed
goofed when it set prices for interchange. U.S. District Court Judge Richard
Leon ordered a do-over. His ruling instructed the Fed analysts to go back
to the drawing board and come up with still lower rates.
Judge Leon relied in his decision on the words of no less a
banking authority than Sen. Dick Durbin, who had proposed the amendment to the
EFT Act, and had lobbied for it for years.
Now, I like Sen. Durbin. I admire his spunk. His candor. His
Chicago-style directness. He’s Anthony Weiner with clothes on. But he’s a
politician. A partisan. He’s not exactly an unimpeachable source of information.
As my good friend and payment expert Peter
Quadagno says it wasn’t the Fed that erred—it was the Court. In examining
the pricing the Court failed to consider the net present value
of the debit routing systems. In other words the value of the pricing should reflect
not just what the last transaction cost, but cumulative costs over time that it
took to develop the routing systems to their current state.
Pricing, unfortunately, was the easy part. Judge Leon also
took the Fed to the woodshed for the way it implemented Congress’ instruction
on making sure that merchants had alternative routing paths to get those
authorization transactions back to the banks.
Now, it’s worth knowing that there are two types of debit
card transactions. “PIN” debit transactions are authorized by the cardholder
keying in his secret passcode when he makes a purchase with his debit card. “Signature”
debit transactions are authorized when the debit cardholder signs for the
transaction.
Somehow Judge Leon divined that the Fed intended that the “alternative
routing” meant that for each authorization method there should actually be four
alternatives, not two: two competing methods for signature and two for PIN
debit authorization.
Further, the Oracle of DC somehow figured out that what Congress
really meant, as opposed to what it wrote, was that merchants should have their
choice of network routing after the transaction is authorized
by the bank. Huh? How do you authorize the network route after you’re already sent
the message on a network? This isn’t like shopping in a catalog. You don’t
thumb through the book, find the rate you want and then call a network’s 800
number.
Needless to say, the Fed is appealing Judge Leon’s Opinion.
The reason I bring all this up is that it is a textbook case
of what happens when government decides to bigfoot its way into the free
market. Here you have the daily
double—both Congress and the courts setting prices. All you need is Pres.
Obama weighing in and you’ll have the trifecta of government –created market distortion.
Somehow I think the president has more important things to worry about.
My word to the plaintiffs in this case: You’re big boys.
Time to grow up. If you don’t like your electronic payments deal, negotiate a
better one. Or better yet, stop taking credit and debit cards. There are a lot
of businesses that still refuse to honor plastic. They’ve made an
intellectually honest business decision based on the market.
But big department stores and box retailers know that most
of their payments are plastic. And they don’t want to risk alienating their
customers. Seeking court protection on fees is intellectually dishonest. It’s
dishonest because ultimately the retailers don’t pay those fees. Interchange is
a selling expense that is passed on to customers in the form of higher pricing.
But following the implementation of the Fed-mandated lower
interchange rates, you’d have better luck finding a light bulb in Aisle 87 at
Home Depot than you would a retailer who shared the interchange savings with
its customers.
So this isn’t about asking the Court to redress unfairness
in the market. It’s about a nasty, cheap way to grow margin without having to
do any work for it.
Government price fixing is a slippery slope. If the solons
in Congress want to do something useful, they can create fiscal conditions that
are conducive to creating a healthy and vibrant economy. Not one distorted by
the dead hand of government.