Yesterday, I shared with you the grim news of the Durbin Amendment and how it will effect everyone every time they pay for anything.

Strange Bedfellows

It has been said that politics makes for strange bedfellows.    Last year, I spent much of my time and effort supporting the CARD Act, which was strongly opposed by the banks.    The banks loved to pretend that the CARD Act was going to be bad for consumers, while I contended that they should stick to pronouncing how the CARD Act will effect them, and leave consumer advocates to represent consumers.   To do otherwise, was paternalistic and disingenous.

How Times Have Changed

Now, in light of the Durbin Amendment, I cna forsee a rare alignment of the interests between banks and consumers.    I have already pointed out how consumers will be screwed by this bill.     The bill unquestionably shifts transaction costs to consumers while destroying price transparency in everyday purchases.

I am will to risk of being paternalistic and disingenuous myself when it comes to describing the effects of the Durbin Amendment on banks, as unlike the CARD Act debate, my interests as a consumer advocate do not conflict with the banks and the credit card companies.

Banks And Credit Card Companies Are Going To Be In Big Trouble

When the day comes when I will be faced with a substantially lower price for using cash or check, I am going to have a real hard time justifying pulling my credit card out of my wallet.   It is very easy to imagine merchants raising the credit card surcharge or cash discount (they are essentially the same thing) far beyond their interchange fees and very close to my present reward value.    This will be compounded by the fact that as fewer consumers use credit cards for daily transactions, credit card companies will earn less in interchange fees.    Furthermore, the Durbin Amendment will have the otherwise reasonable effect of lowering interchange fees across the board.

I can see no other outcome to this disruption of the status quo than a massive decline in interchange (swipe) fees as consumer flock away from credit cards, especially deadbeats.     You might be thinking; “Jason is a real credit card guru, but the average card holder won’t really notice a couple percent here or there and change their behavior.”     I am afraid this is not so.    Check out the comments to this article about the Durbin Amendment in the Consumerist;

Stores won’t lower their prices, this is profit you won’t notice. Instead, they’ll charge a credit card fee, and prices will go up!

This is a consumer-unfriendly move.

I’m sure that all retailers will immediately lower their prices because of the reduction of swipe fees. …oh wait, no they won’t.”>I’m sure that all retailers will immediately lower their prices because of the reduction of swipe fees.

…oh wait, no they won’t.

I currently have 2 motivations for using my CC:

1. Easy to track expenses without the receipts.
2. Cash back. (I don’t every carry a balance)

If the cash back goes away and stores offer a cash discount due to this bill, I will stop using my CC for most purchases…

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!