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Against Their Own Interests

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One of the saddest stories in American politics, which happens all too often, is when small- and medium-sized community-based businesses lobby against common-sense regulations that would help them compete against the big business conglomerates that dominate their industry. Because of a knee-jerk fear of any regulation, a lot of times the big companies will convince their smaller brethren to be the lead lobbyists fighting something that would actually go a long ways in helping the small guys have a more level playing field with the big dogs.

The classic example lately is on banking policy. The six biggest banks in America control assets equaling more than 64 percent of our national GDP, and because they are Too Big To Fail, they end up getting major market advantages over smaller financial institutions. These Wall Street behemoths' economic clout is making it harder and harder for credit unions and smaller community banks to survive, which is a terrible shame because they are the ones who do most investing in small businesses at the local level. In the financial reform bill that was passed last year, most of the regulations that were passed were designed to create oversight of these biggest banks and leave the smaller ones alone, since the problems that caused the financial collapse were all centered in what the big banks were doing, yet the smaller banks and credit unions frequently sided with the big banks out of a mindless fear of any regulation at all.

One important aspect of this is an issue I have been working on a lot with a coalition of retail businesses and consumer groups, swipe fee reform. If you live in D.C. or in a state or congressional district targeted by the bankers, it's tough to miss the ubiquitous and alarming ads about how Congress wants to take away your debit card. These confusing advertisements -- sponsored by the Electronic Payments Coalition (read: Bank of America, Capital One, Citi, JPMorgan Chase, MasterCard, Visa, et al.) -- imply that banks will be so robbed by the swipe fee cap in the 2010 Wall Street reform law that their customers will have to do without things like free checking and debit cards.

A debit card "swipe fee" is what Visa and MasterCard charge retailers, and in turn consumers, for every transaction made with a card. The fees generally cost businesses 1 to 2 percent of every transaction, and handed $16.2 billion to the big banks in 2009. (Banks and credit unions themselves have admitted the per transaction fees far exceed the actual cost of service.) Sen. Durbin offered an amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act that required the Federal Reserve to provide some regulation of debit card swipe fees so that the big banks who thoroughly dominate this market (Visa and MasterCard, which are subsidiaries of the big banks, represent more than 80 percent of the debit card market) couldn't just charge any outrageous swipe fees.

When Durbin offered his amendment 63 Senators voted for it, including some Republicans. But the big banks have plenty of money, lobbyists, and influence -- and they keep chipping away at this. The Senate is expected to vote on an amendment to delay any swipe fee reform when they return from recess June 6.

Small banks and credit unions have been convinced to help out their big Wall Street competitors, even though the Durbin Amendment exempts small banks by only applying the fee cap to banks and credit unions with $10 billion or more in assets. In fact, it is clear that small banks and credit unions would actually benefit from the Durbin Amendment .

In its suit challenging the swipe fee cap in the U.S. District Court in South Dakota, TCF Bank shed some real light on how well the small bank exemption will work and help small banks compete with the previously unchecked Wall Street giants:

If TCF begins charging its customers a "swipe fee" or a monthly fee for services, customers will switch to one of the 99 percent of banks not affected by the Durbin Amendment, which can continue to offer free checking/debit account and recover all related costs as they do today. Each TCF branch is surrounded by branches of competitors who are exempt from the Durbin Amendment. Indeed, in Minnesota, for example, only seven banks that accept deposits will be subject to the forthcoming Durbin Amendment regulations, while over 400 exempt banks and savings institutions (not counting credit unions) compete with TCF branches in Minnesota.

Readers of American Banker, an industry publication, also agreed that small banks win under the Durbin Amendment:

(T)here's a healthy dose of skepticism, at least among American Banker readers, that some of the doomsday scenarios bankers are predicting (such as merchants pitching big-bank cards at the point of sale) will come to pass, according to the recent online poll.

Sixty percent of online voters took the side of industry consultant Andrew Kahr, who wrote in a recent Viewpoint that the Durbin amendment will actually help banks under $10 billion in assets because the regulation exempts them from a pending 12-cent cap on interchange fees.

The problem here is that those who oppose the Durbin Amendment can't even get their story straight. It's unfortunate that some community bankers have gotten caught up on the wrong side of this battle, but the bottom line still couldn't be clearer. This is a straightforward fight between Main Street retailers/community banks/consumers and the Wall Street/big bank set. The community bankers and credit unions should be smart and get on the correct side of the issue. And Democrats who are helping the big banks over small Main Street businesses should have their heads examined, because those kind of politics make no sense.

One final point: with the bad news today on jobs, and the Republicans' determination that no new jobs legislation should pass through Congress, it is very clear that the only chance we have for making big improvements in the economy in the short term is by taking on these big Wall Street banks that are hoarding so much money. Swipe fee regulation injects money straight into the economy through lower retail prices and more money for struggling small businesses, so that is one important thing we can do. And we need to force these banks to start writing down mortgages on underwater loans, which would help revive the housing market and inject a major amount of new money into the economy because of lowered monthly house payments. The big banks have way too much of our money, and they aren't making the loans that would create more jobs, so let's free up some of that money to help the economy.