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The Dodd-Frank financial overhaul that passed last July charged the U.S. Treasury with fixing the prices that banks could charge merchants for debit card transactions. And on Dec. 16, the Treasury lowered the boom.
Interchange fees for banks were set at 12 cents per transaction vs. a prior average of more than 44 cents, prospectively eliminating roughly $12 billion in annual revenue. These are the same banks for which the Fed is busy guaranteeing trillions of dollars in mortgage loans so they won't be considered insolvent.
In a great example of what I call the "congressional effect" of changing legislative rules on stock prices, MasterCard shares dropped more than 10% the same day. By contrast, share prices rose for Congress' targeted beneficiaries — big retailers such as Wal-Mart. It was up 40 cents a share, a gain of less than 0.75%.
Congress thought it was taking a zero sum game and reallocating winners and losers.
But the truer measure is what happened to market capitalizations of the sectors overall: MasterCard and Visa were crushed, and the retailers gained a little.
Taken as a whole, the government didn't just re-slice the pie. It made the pie smaller for everyone. The real result was that it was a less-than-zero-sum game after the government intruded.
So investors on balance lost from this deal. The other real losers will be consumers, many of whom will go from having free debit cards and free checking and free airline miles to now having to pay for each of these services with cash. The retailers will make more money, and there's no guarantee they'll pass the savings back to the consumer.
Wealthy consumers will perhaps pay a little less. But it's fundamentally wrong for the federal government to fix prices.
For some consumers, like grandmas who occasionally use their airline miles to see their grandchildren, the old arrangement may have been a much better way to save.
In the health care debate, there was a persistent reference to the crisis of millions of uninsured. In the wake of Dodd-Frank and this Fed ruling a little while ago, Jamie Dimon, the CEO of JPMorgan, said it can be reasonably expected that something like 5% of consumers "might be forced to leave the banking system." What will we now call them — the de-banked?
The newly de-banked will lose access to free debit cards and free checking and free airline miles altogether from this law. In their advertising, companies such as MasterCard emphasize it's not the dollar amount at issue; it's the flexibility of having the choice about what to do at the exact moment it should be done. For many, Dodd-Frank diminishes or completely eliminates that choice.
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Posted By: Judith from Michigan(3530) on 3/4/2011 | 12:05 AM ET
Oh, but there most definitely is a legitimate govt interest here. It is called Control. Socialism. Soviet-Style Central Planning. It's unfortunate that the US has to suffer through the fools in charge as they grandly try to bring us the glories of these rotten policies until we can elect, next year, a new admin who wants America to prosper again.
Posted By: dwdrury(3440) on 3/3/2011 | 11:34 PM ET
Thing about zip codes is its a way for the authorization service to check the card's not stolen, as a thief or buyer of the card number isn't as likely to know the holder's zip.
Posted By: Tom in Michigan(6705) on 3/3/2011 | 10:41 PM ET
The irony is delicious. Wal-Mart, viciously hated by the left gets a boost and, the banks who cast their lot with the left take a haircut. It just proves, once again that cosmic truism-if you associate with, ally with, patronize or rely on the left, sooner or later you'll be "Sheehaned," cast aside or hosed when your usefulness to the left is spent. All of you who come here who are not on the Sorosista payroll; reject these people before your time to be "Sheehaned" comes.
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