Preaching to the Wrong Choir

Republican backers of repeal of the Durbin Amendment lost a key battle this spring because they concentrated their arguments on Congressmen and financial institutions. Success in the future will depend on firing up consumers, argues Eric Grover.

On June 8, the House of Representatives passed the Financial Choice Act, albeit stripped of repeal of the intensely disputed Durbin Amendment. House Financial Services Committee Chairman Jeb Hensarling described the repeal provision as “the most contentious part of the bill among Republicans.” It was dropped from the bill, which would roll back much of the 2010 Dodd-Frank Act, because the merchant lobby rattled enough Republicans that keeping it would have jeopardized the entire financial-regulatory-reform package.

While he steadfastly opposes the Durbin Amendment’s interchange price controls, Hensarling opted to settle for what’s possible today, including giving banks with sufficient capital an off-ramp from Dodd-Frank’s regulatory straitjacket, and to work to create more favorable conditions to get more down the road.

The failure of repeal showed how the merchant lobby took the payments industry and banks to school. It put heat on Republicans in their districts. In contrast, the payments industry lobbied for its righteous cause inside the Beltway.

Thus far, Congressmen have been more afraid of merchants than of banks, and cardholders haven’t had a seat at the table.

Stoking Fury

America’s largest banks are routinely and casually pilloried, while politicians on both sides of the aisle at least pay lip service to loving small banks. But every Congressman has in his district thousands of politically sympathetic and engaged merchants and relatively few banks. So the payments industry’s longstanding strategy of hiding behind the skirts of small banks was a loser, all the more so as these banks are exempt from Sen. Richard Durbin’s price controls.

The industry did attack merchants for not passing debit-interchange savings on to consumers. All well and good, but that wasn’t dispositive. Also, the argument suggested price controls would have been justified if they had.

Remember, politicians respond to incentives.

Throughout this epic struggle, the industry made little effort to woo several hundred million cardholders (voters). Such an appeal could be easily mounted. The merchant lobby’s ultimate goal is a price ceiling of zero for all interchange fees. Likewise, the payments industry needs to take the gloves off. Fury should be stoked in credit and debit card holders by making it clear a Congress that won’t act wants them to pay higher fees and forfeit rewards.

Enraged cardholders flooding their representatives’ offices with calls, faxes, and email, and confronting them at town halls, would create conditions conducive to driving a stake into the heart of Durbin’s mischief.

The Financial Services Roundtable’s chief executive, Tim Pawlenty, is right in counseling that “Government shouldn’t be in the business of setting price controls on rapidly innovating products, like payment methods, any more than it should be setting price controls on fast-food or kids sneakers” as they “stifle innovation and reduce competition and choices for customers.”

Prices dynamically allocate re?sources to their optimal use. Debit-interchange caps created a shortage of value and innovation on the issuer side of the network for cardholders.

Hurting the Little Guy

Can interchange price controls still be rolled back?

Republicans and many Democrats in principle oppose government price controls. In practice, though, many support them when a favored special interest benefits. Given the poisonous atmosphere on the Hill and the limited legislative calendar, this Congress will be hard-pressed to deliver the Choice Act, tax reform, an infrastructure bill, and an overhaul of Obamacare, much less to consider a freestanding repeal of Durbin.

However, if the payments industry doesn’t change its strategy, repeal won’t happen, ever, even if and when there’s a legislative window of opportunity.

Repealing interchange caps would be good for consumers and banks. Banks have lost $42 billion in debit-interchange revenue due to interchange caps, partially offset by a shift of spending from debit to unregulated credit. Surely they could invest half a billion dollars to fund a hard-hitting, nationwide repeal campaign.

Narratives are often stronger with a villain. Illinois’s senior senator vilified the payments industry. He should be pilloried for the harm he’s inflicted on average Americans.

The payments industry must make the case to consumers in towns across America that they would benefit from repeal of interchange caps. It should hammer home the message that interchange regulation hurts them by suppressing payment-card benefits, increasing fees, and stifling innovation.

Democrats should be enlisted. They profess to be for the little guy. Some are. Debit-interchange caps in particular hurt the little guy. Democrats implicitly understood this in 2010, as they chose to exempt from Durbin’s controls general-purpose reloadable prepaid cards for the unbanked and underbanked, government benefit cards, and beleaguered community banks.

Getting Educated

Industry lobbyists insist they aren’t ready to throw in the towel. Reacting to Hensarling’s decision to pull repeal of the Durbin Amendment from the Choice Act, Pawlenty promised, “We will continue to work with Congress and other stakeholders to ensure customers have access to the innovative and convenient payment products they demand without government picking winners and losers.”

The Electronic Payments Coalition’s executive director, Molly Wilkinson, insists the EPC, too, remains committed to repeal. American Bankers Association chief executive Rob Nichols declared, “We will continue to let members know that a vote to keep the Durbin Amendment on the books is a vote for government price controls and against consumers.”

Congressmen, however, are not the audience the ABA and its allies need to educate. If consumers are educated and fired up, wobbly Congressmen will get “educated” pretty quickly.