JP Morgan Chase CEO Jamie Dimon recently described Sen. Dick Durbin’s amendment regulating debit card interchange fees as “counterproductive,” “price fixing at its worst,” and “downright idiotic.” Felix Salmon directs us to Durbin’s acid reply, which is well worth reading in full. But I want to highlight one of the more boring passages from Durbin’s letter, which gets at the core reason for regulating these fees:
A strong bipartisan majority supported my amendment, which said that if Visa and MasterCard are going to fix fee rates on behalf of banks […], those rates must be reasonable and proportional to the cost of processing the transaction. It is important to make clear that if Chase wants to set and charge its own fees in a competitive market environment, the amendment does not regulate those fees. The only regulated fees are those fees that banks let card networks fix on their behalf.
This is the guts of the case for regulating swipe fees: Visa and MasterCard are an effective monopoly, and they’re able to set fees with virtually no competitive pressure. What’s worse, their member banks collude to insure that fees stay high. After all, as long as everyone gets charged the same rate, it’s in their interest to make sure that swipe fees are as high as possible. As Durbin points out, this leads to almost comically corrupt behavior, like banks actively encouraging their customers to use signature debit rather than PIN debit, even though signature debit is more fraud prone. Why? Because the interchange fees are higher:
Durbin’s amendment is unquestionably second best policy. The first best policy would be genuine competition between banks that issue debit cards along with the freedom for merchants to pass along interchange fees to customers if they want to. That would very quickly set a market rate for interchange fees, one that would almost certainly be far lower than current rates.
But banks aren’t willing to do that. They know perfectly well that it’s Visa and MasterCard that are engaging in price fixing, not Durbin. Their monopoly position allows them to extract enormous rents from merchants and consumers, and they don’t want to give that up. Monopolists never do. Thus the need for Durbin’s amendment.