Business versus Business Businesses are on the opposite sides of a variety of issues. In 2010 retailers sought to reduce the fees they paid on credit and debit card sales and faced off against the card companies and the banks that issue the cards. The institutional arena was Congress. \"Greenblat (1998). \"Greenblat (1998). 4\"www.cstorecentral.comlpublicfnacsir-1'05.htrn. 41Greenblat (1998). Data provided by Bulow and Klemperer (1993); Table 10, however, suggests that all tobacco marketing expenses are treated as advertis- ing expenses in the $5 billion gure. Most marketing expenses are promotional allowances such as price cuts for distributors and coupon and retail value- added promotions, neither of which would be prohibited by the bill. Retailers were estimated to pay $48 billion annually for \"swipe fees\" on credit and debit card purchases, accord- ing to the Nilson Report. Debit cards accounted for somewhat less than half the amount, but the cards were growing rapidly in popularity. Retailers sought to reduce the swipe fees paid when customers used the cards for payments. The swipe fees included network fees that were paid by merchants to Visa and MasterCard and interchange fees of $15.8 billion that were paid 42Some legal scholars believed the advertising provisions in 8.1415 would be subject to court challenges on grounds of violating the First Amendment. by retailers to the issuers of the debit cards. primarily banks such as JPMorgan Chase. The interchange fees amounted to $19.2r billion in 2009. and averaged 1.63 percent of the transaction amount which was much higher than the costs of processing a check. The opportunity for retailers was the Obama administra tion's nancial reform initiative. The House passed its version of the bill, which included a provision to regulate interchange fees, with the Federal Reserve as the regulator. The Senate ver sion of the bill incorporated an amendment authored by Senator Dick Durbin (DlL) that included the regulation of network fees as well. The shares of Visa fell by 9.9 percent and MasterCard fell by 3.6 percent when the Durbin amendment passed.'43 The share prices of the largest card issuers. Citigroup, Bank of America. and JPMorgan Chase. which had debit card usage of $550 billion in 2009, fell between 2.3 and 3.1 percent. Visa stated. "We hope Congress sees today's amendment for what it isan attempt by retailers to increase their prots at the expense of consumers?\" Lobbying on the Durbin amendment was intense. and after it passed, attention turned to the conference committee that would reconcile differences between the House and Senate bills. Large card issuers such as JPMorgan Chase lobbied intensely against the regulation. The card companies argued that reducing the interchange fees would result in higher charges for consumers. The banks argued that any reductions in interchange fees would require them to raise fees on other services and reduce rewards programs. Noah Hanft, general counsel of MasterCard explained, "We continue to have con cerns that the ultimate outcome of this legislation would be the passing of merchant acceptance costs to consumers at a time when Americans can least afford it."\"5 The banks also argued that any reductions in fees would go into the profits of retailers rather than the pockets of con sumers. Ken Clayton of the American Bankers Association said, "We kind of view this as a direct transfer from the con sumers' pockets to retailers' bottom lines. Who ends up feeling the burden from this? Financial institutions lose a revenue stream that allows them to offer other services to lowincome consumers.\"445 The retailers were equally active. Home Depot stated, "Any relief as it pertains to these fees will give Home Depot the ability to reduce our cost of doing business . . .. Such bene ts are likely to include lower prices and investment in the business to better serve customers\"? Scott Mason of Lowe's Companies said, "Every dollar we pay the creditcard compa nies is a dollar we can't pass on to consumers or use to hire employees. literally you are talking about htmdreds of millions of dollars.\"48 Eric Hausman of Target Corporation said. \"They do cost us hundreds of millions of dollarsan expense we cannot controland become part of the cost of goods sold, which many people do not realize."\"'3 The conferees eliminated the regulation of network fees. and the shares of Visa and MasterCard increased by 5.0 per cent and 4.3 percentI respectively. The House and Senate con ferees failed to agree on a rule for interchange fees, but instead mandated a study to be conducted and a deadline to act. The language in the conference agreement directed the Federal Reserve to limit the interchange fee to a level that was \"reason able and proportional\" to the actual costs of processing trans actions. The agreement gave the Federal Reserve 9 months to study the issue and set a limit on the feesm John Emling, a lobbyist representing the Retail Industry Leaders Association. saidI \"We have the data ready and we have the right people ready to go to the Fed, and we've had an ongoing dialogue with the Fed?\" Retailers would also be allowed to offer discounts to people who paid irt cash, but the discounts could not depend on the issuer of the card that would otherwise have been used. Merchants were also allowed to run their debit card transac tions on two networks. so a transaction paid with a MasterCard debit card could be processed on VisaNet. These provisions gave merchants greater bargaining power relative to the card issuer. The Federal Reserve was required to issue a nal rule by April 21, 2011. and in advance it issued a proposed rule that would cap the swipe fee at $0.12. The average charges under the current system were $0.44. so the card issuers would lose huge amounts of revenue. The Boston Consulting Group esti mated that card issuers would lose $9 billion in revenue because of the Durbin Amendment and another $16 billion because of the Federal Reserve's anticipated rule making and the Credit CARD Act of 200952 Banks with assets less than $10 billion were exempted from the regulation, but even though their fees were exempt. credit unions and community banks were concerned about competitive forces. The Fed's proposed rate generated renewed political activity by small community banks, which argued that they would be forced by competitive pressures to meet the $0.12 rate. The banks said this would force them to raise fees on depositors\" accounts or reduce the nancial prod ucts they offer. In response the Financial lrrstitutions and Consumer Credit subcommittee of the House Financial Services Committee held a hearing on the Fed's rate setting. In testimony Federal Reserve Chairman Ben Bernanke said. \"It is possible the exemption will not be effective in the market place.\" Sheila Bair, Chairman of the Federal Deposit Insurance Corporation said. "I think the likelihood of this hurting com munity banks and requiring them to increase fees they charge for accounts is much greater than any tiny benefits retail customers maybe get from any savings." Senator Durbin said that Chairman Bernanke was \"just basically wrong."53 The Fed announced that it was reserving judgment about the nal rule until all the comments received had been considered. When the proposed rule was announced, the card issuers and banks added a new dimension to the issue in arguing that the DoddFrank Act directed it to set a swipe fee that was lim ited to the \"reasonable and proportional" cost of transactions but the Fed had ignored debit card fraud which cost the card issuers and banks $1.4 billion in 20051.54 The banks also claimed that the reductions in swipe fees would benet large retailers rather than the small retailers that the reduction in swipe fees was supposed to benet. John F. Buckley Jr. of the Gerber Federal Credit Union, told a congressional subcommit tee, \"I am appalled that our members will shoulder tremendous nancial burden and still be on the hook for hand loss while large retailers receive a giant windfall at the hands of the gov- ernment."55 The banks referred to a comment made by a Home Depot executive that the company would gain $35 million 'om the reduction. Copyright IE 20]] by David P'. Baron. All rights reserved. Reprinted with permission. The retailers countered with a yin by convenience store owners who complained that high swipe fees hurt their com petitiveness. \" \"These fees are stunting business growth and hurting efforts to hire more workers and expand operations,' Douglas Kanter, a lobbyist for the Merchants Payments Coalition, a retailer trade group, said recently."56 I ISSUE Processors and banks charge debit card interchange fees that impose costs on retailers OBJECTIVE Pass law directing Federal Reserve to limit interchange fees Demand for Nonmarket Action Supply of Nonmarket Action Effectiveness Pro Groups Substitutes Magnitude of Aggregate Benefits Per Capita Benefits Numbers Coverage Resources Cost of Organizing Expected Influence Retail Group Home Depot Con Groups Substitutes Magnitude of Aggregate Harms Per Capita Costs Numbers Coverage Resources Cost of Organizing Expected Influence