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Debit-card fee battle reveals massive infighting

Despite loss, banks' stocks improve after Fed 'compromise' announced


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Sounds as though we could use some more political "wins for both sides" such as has seemingly emerged in the battle over debit-card fees that merchants pay to banks. Retailers have long felt gouged by the big car-servicing banks that charge 44 cents per transaction every time a customer whips out a bank debit card instead of cash. Yet the big banks howled at the Fed's idea to cut the price from 44 cents to 12 cents, threatening more of the usual "We'll have to charge consumers more!"

Fed board's ruling nearly doubles proposed reduction


Let's look at two accounts of a recent Federal Reserve Board ruling, first a June 29 lede from Bloomberg Businessweek:
The Federal Reserve Board set a 21- cent cap on debit-card transaction fees, a less-severe limit on banks and payment networks than it previously proposed. Financial stocks surged.

The rule approved 4-1 by the Fed governors today almost doubles the 12-cent ceiling that the central bank first suggested in December. The no vote was cast by Elizabeth Duke, who said the measure was likely to harm small banks and raise the costs for checking account holders. Other governors, who voiced similar concerns, said the central bank had to weigh in after Congress required it to address the fees.

“This is the best available solution,” said Chairman Ben S. Bernanke, who called the process “one of our most challenging rulemakings.”

How can the big banks gripe? They get nearly double the rate from the proposed choke-downl of 12 cents per transaction--plus, stocks advance on the news. Bankster honchos whose incomes thrive on stock bonuses seem unable to lose, as evidenced in our preceding post, which discusses Bank of America's stock rally on the news of its $8.5 billion settlement for misleading bondholders. (Note: BoA CEO Jamie Dimon figures prominently in this story, too.)

WalMart a lobbying champion of underdog?


Now let's visit a long, in-depth piece from a sister publication, an advance analysis of the ruling from Bloomberg, a true behind-the-scenes peek into the machinati0ns of legislation during the Age of Plutonomy. Following is the lede from "How Wal-Mart Swiped JPMorgan in $16 Billion Debit-Card Lobbying Battle":
Jennifer Cavallaro’s Twitter feed usually deals with matters like the free-range egg salad she serves at her Beehive Café in Bristol, Rhode Island. On May 17, 2010, she blasted a different message to her followers.

She cited her recent trip to Washington, where she lobbied to cut the average 44 cents that merchants must pay a bank whenever a customer uses a debit card. “Remember I went to DC?” she wrote. “Well believe it or not it worked! New law will cap fees for consumers and businesses soon!!!!”

Cavallaro was a recruit in the retail industry’s surprise victorious assault on one of the most reliable income streams for big banks, worth $16 billion a year. Her message hailed the U.S. Senate’s decision that week to include a cap on debit-card fees in its bill overhauling rules for Wall Street.

Far from ending the matter, the vote touched off one of the most intense lobbying duels in memory as the banking industry, Visa Inc. (V) and MasterCard Inc. (MA) sought to kill or delay the debit- card measure. It raged for more than a year, culminating on June 8 when the banks lost a cliffhanger of a vote in the Senate.

The behind-the-scenes story of the swipe-fee war -- reconstructed from public and confidential documents and interviews with more than 30 people in Congress, regulatory agencies and industry -- shows how far the richest interest groups can go when a single decision puts billions of dollars up for grabs.

Now, that makes it sound as though WalMart somehow championed its hordes of consumers--and, by extension, consumers across the land. The romance! The glory! Fighting for the common man, WalMart whups JP Morgan Chase in billion-dollar battle!

I suspect the truth is something more akin to a battle between elephants and the little guy hunkered down in the grass gets whatever's left over. Surely, retailers have long chafed at their relatively small voice in big-bank matters and chafed at paying nearly 50 cents everytime a debit-card customer walks out the door with, perhaps a $75 fuel-and-beer tab--or perhaps a $1.50 gum-and-candy transaction.

Behind-the-scenes tale well worth reading


It's worthwhile to read both articles, but particularly telling to glimpse behind the scenes of the longer, in-depth Bloomberg piece. Here's a few quotes and excerpted scenes (with our emphases added), perhaps not in full context but larrupin' good, juicy tidbits, for sure:


  • Together, they deployed more than 500 lobbyists and spent some $30 million, according to people briefed on the expenditures. Their campaigns fanned dissension inside the Federal Reserve and created curious alliances as Tea Party freshmen, Indian tribes, tax activist Grover Norquist and the nation’s biggest teachers union entered the fray.

  • The banks’ failure to win a delay means that a debit-card cap will likely be locked into place tomorrow when the Federal Reserve, charged by Congress with implementing the rule, is scheduled to release its final language. While that may end the Washington debate, the decision will reverberate for consumers, as banks consider whether to recoup the lost revenue by ending free checking accounts and debit-card rewards programs. Still in question is whether retailers will pass some of the spoils of their victory back to shoppers through lower prices.

  • The focus groups showed that business owners were keenly aware of swipe fees while consumers were “easily confused” by the retailers’ past efforts to explain why they should care, according to an internal report on the research. That led the retail lobby to abandon attempts to educate consumers and instead concentrate on firing up small merchants to lobby their congressional representatives, the people involved said.

  • Five months later, the Fed stunned the industry -- and the markets. On Dec. 16, it proposed capping swipe fees at 12 cents a transaction. Visa and MasterCard shares plunged more than 10 percent over fears for their business model.



Fed shows how agency-approach can take brinkmanship into more consumer-friendly territory


Regardless of whether you're considering bankruptcy protection, stories like this show the importance of understanding contemporary forces on the everyday consumer. We applaud the Fed's take on a King Solomon solution: Threaten to quarter the baby, then just cut it in half. Of course, we'll have to wait to see what the card industry will come up with in response.

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