Senate Passes Durbin Amendment

Last week, I have introduced Swipe Fees and spoke More On Swipe Fees.

Later, I presented The Case Against Swipe Fees, followed by my rebuttal.

On Thursday, May 13th, the Senate passed the Durbin Amendment S.3932 to the latest financial regulation overhaul bill.

How Does This Pertain To Credit Cards?

Here is the text of the Durbin Amendment.

Much of it pertains to debit cards, however there are two major areas where credit cards will be affected:

1. Interchange, or swipe fees will be regulated and set at a “reasonable”.

2. Merchants will have the ability to offer “discounts” for one form of payment over another as well as minimum and maximum transaction amounts for various forms of payment.    More precisely, credit card companies will not be allowed to insist as a condition of acceptance that merchants charge the same price for all forms of payment, nor may credit card companies forbid merchants from imposing transaction minimums or maximums.

Here Comes The Wild Wild West

If this bill contains this amendment and is signed into law, the effects on the consumer will be profound.    Gone will be the days where “cash or credit” and “paper or plastic” were simple decisions.   Every time you take out your wallet, you will need to calculate how much the final bill will be depending on your method of payment.   Every time you enter a store, you will need to familiarize yourself with it’s policies concerning minimum and maximum payment amount for various forms of payment.

We will look back nostalgically on the days where the Amex symbol on the door meant that you could, without question, pay for your goods and services with your Amex a the same price you would have with cash or MasterCard or a check or a debit card.   In this new world, interchange fees will be regulated by the Federal Reserve in order to “be reasonable and proportional to the actual cost incurred by the issuer or payment card network with respect to the transaction.”

On the other hand, there won’t be anything stopping merchants from adding on addition surcharges for credit card use, reasonable or otherwise.     Your grocery store may be free to charge a 5% fee for using your Amex, even if their swipe fee is 3%.    The same is true of minimums.   Your favorite coffee shop may set it’s minimum credit card fee 5 cents above it’s most popular offering, in the hopes of inducing you to the next larger size.

Indirect Effects

What I listed above are merely the direct effects of the law, clearly outlined in it’s language.   The indirect effects are even more troubling.      As swipe fees go down, so too will reward card offerings.   It is no secret that banks have been increasingly relying on swipe fees in the post CARD Act environment.    Banks complained vigorously when the CARD Act provisions hurt their profits.    They attempted to scare consumers into believing that the CARD Act will cost them their rewards while forcing them to impose annual fees.   Neither of which actually happened.

Now that that their is a law being considered that will actually have the effect of decreasing rewards while shifting the transaction costs to consumers, the banks have been much more silent.   Sadly, I haven’t heard from any consumer groups either.    They have been a little slow to put two and two together and see where this is going.    Without a doubt, this amendment will reduce merchant’s costs while shifting it to consumers.

Assault on Price Transparency

Price transparency is the ease and ability of a purchaser to understand what the price of goods and services are.     The most price transparent market we see in our day to day life is gasoline.    The price, including all taxes,  is typically listed in large letters on a sign outside the station.    The least price transparent markets are in the travel industry, such as rental cars, hotels, and airfare.   In these cases, you have to take several steps towards a reservation or purchase until you are able to discover the final cost of the service.    The telecommunications industry is also an egregiously unhealthy market when it comes to price transparency.

One of the real problems with this amendment will be that we will lose all semblance of price transparency in almost all of are daily transactions.    Each price we see will have to be weighed against the method of payment and the merchant’s fine print indicating what surcharges and discounts are being offered based on which method of payment is used.    PIN versus signature debit card transactions will certainly be priced differently than each other.

On The Bright Side

I have been following the lawmaking process long enough to know that this bill is a long way from passage and it may or may not contain this amendment when and if it is ever signed into law.  My only hope is that the unlikely bedfellows of consumers and banks will wake up and realize that they are both getting screwed here.

The Future?

Currently, merchants benefit from credit card transactions and they have to pay for that service.    If this amendment becomes law, that transaction cost will be shifted to consumers, and we will all lose something we have taken for granted, market transparencey.    It may not be long until every every purchase we make is as fun as signing up for cell phone service or making a rental car reservation.   Oh Joy!