The Green Sheet Online Edition
May 24, 2010 • Issue 10:05:02
Insider's report on payments
Deregulation, regulation and you
I had the opportunity to catch up with a former colleague recently. Lauryn had been editor in charge of a group of banking and electronic funds transfer newsletters I wrote for in the 1980s.
Not unlike today, the 1980s brought unprecedented change to financial institutions. Seminal legislation succeeded in eliminating federal interest rate caps and restrictions on savings and loan investments. The intention had been to "level the playing field" by placing savings and loans on a more equal footing with commercial banks.
Lauryn had a business background. She believed deregulation was what the industry needed to make it efficient and more competitive.
I had a regulatory background. I wasn't convinced deregulation (at least as it was unfolding) was the way to go. After all, the banks, savings and loans, and other financial institutions had been coddled for years. The government had been dictated deposit and lending rates and was always at the ready to work things out when a large bank looked like it messed up and was about to fail. I wasn't convinced there was enough motivation, or experience, among bankers for the market to self regulate.
We all know today how it played out. Greed and egos got in the way of common sense, and the economy slipped into the worst downturn in generations. Regulators and the U.S. Department of the Treasury rescued banks deemed "too big to fail."
Folks who never should have been given mortgages faced foreclosures and bankruptcies. And tens of millions of average Americans ended up on the unemployment line and/or living in homes with plummeting values.
When I met up with Lauryn again, we hadn't seen each other in about 15 years. As you might expect, the conversation soon turned to banking, the economy and financial reform legislation. When I reminded her of our differences of opinion "back in the day," she just grimaced. "Yeah, I can't believe how they're fighting legislation," she said.
I realize this is not a popular position in the payments space. But I find it galling that banks are fighting back on financial reform legislation. And I think it's likely to come back and haunt the industry in ways that could slam the payments industry.
Now, I've looked over the legislation, and I agree it's draconian. New reporting requirements, new consumer lending rules and the potential for surprise examinations by a newly created consumer protection board aren't tops on any bank's list of desirable changes. And it's really not clear how some of the regulatory changes will play out.
But, one way or another, Congress will pass financial reform legislation this year. And acquirers and their partners should be concerned (seriously concerned) that the conflict with retailers regarding bankcard interchange is getting pulled into the legislative debate.
Think about it: every congressional district has retailers among its constituents - constituents in the position to boost local economies if only those darn banks weren't so greedy about interchange.
Merchant groups like the National Retail Federation and the National Association of Convenience Stores have launched an all-out assault to get interchange into the reform package.
They've even tried to rename the issue "swipe fees." After all, it's easier to portray the debate as a consumer issue, even though this is an issue that pits one industry against the other.
From my vantage, a legislated solution to the interchange debate will serve only to redirect some of the revenues that now flow to various parties in the acquiring sector to a few dozen large retailers. And if that happens, the economic reverberations could slay countless small businesses.
It's become fashionable to not like banks. But government intervention in the pricing of private business transactions accomplishes nothing. It's been almost 30 years since the price-control genie was let out of the banking industry bottle, and there's no going back.
Proponents of government intervention can't even come up with estimates or examples of how interchange savings might flow to consumers. That's because there's no macro-economic gain to be had from federal (or state) regulation of interchange. It's nothing more than price fixing.
Nevertheless, merchant groups have caught the attention of lawmakers. As I write this column, the U.S. Senate debates a massive financial reform package that includes provisions related to debit card interchange and credit card acceptance.
Authored by Sen. Richard Durbin, D-Ill., a pending amendment to the bill would put the Federal Reserve Board in charge of setting parameters for debit card interchange fees and impose changes in card network policies. Network rules prohibiting merchants from offering discounts for competing card brands or forms of payment would be nixed under Durbin's amendment, as would card company policies that hamstring merchants from declining small-dollar card purchases.
Similar legislation was approved in May by the Vermont state Senate. And Vermont's lone Congressman, Rep. Peter Welch (D), has introduced legislation with similar provisions.
Welch's bill, H.R. 5199, the Electronic Check Parity Act of 2010, also instructs the Fed to apply check processing rules to debit card payments. It's unclear how that would be done, however, since the Fed has no direct involvement in debit card processing.
"If the credit card industry wants to keep marketing debit cards as 'electronic checks,' it ought to follow the same rules checks now follow," Rep. Welch said in introducing his bill. Welch added that he and Sen. Durbin see credit and debit interchange as an issue of great import for small businesses. "[S]mall businesses throughout the country are struggling and simply deserve fairer treatment," he said.
He's right. Small businesses do deserve to be treated fairly. But merchants aren't the only small businesses involved in this debate. It's time for ISOs and merchant level salespeople to be heard; let your representatives in Washington know what this legislation means for your businesses.
Don't count on the banks helping out here; they have their own laundry list of reforms to block. When push comes to shove, interchange is one of those little-understood issues that could become a bargaining chip in late-night negotiations over other, more contentious issues, like the scope of new consumer protections.
Patti Murphy is Senior Editor of The Green Sheet and President of The Takoma Group. E-mail her at email@example.com.
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