Steve: The other day I passed a store with a sign, “We would love to have your dogs and other pets… but state law won’t allow it, so please leave them outside.” This is a fib. They do not want your pets shedding in the aisle, it just comes across more nicely if they blame the government instead. (This is a rather harmless example of the genre, by the way.)

Mind-reader!

Andrew J. Lazarus: In any event, small businesses seem to be in favor of this law. It seems to me that it’s the big banks, always looking for a way to nickel-and-dime a cushion for themselves to cover speculative losses, that are behind the opposition.

My small business isn’t in favor of it. Of course, my small business mostly does financial software development and ends up having to have much greater knowledge of how financial planning has to take place in these areas than most. (IANACPA, but I find my accounting standards tend to be higher than most CPA’s I ask for advice.)

Of course speculative losses will be covered. They’ll be covered in one way or another. It’s just a question of how and who pays the immediate bill. The problem with this bill is it adds MORE uncertainty to questions of speculative losses rather than less. If MC/Visa decide to have a two-rate track, acquirers will assume every transaction costs them the higher rate. If it’s one rate, it squeezes out the little banks. There’s no two ways about it. This becomes especially true with lower-volume accounts. If the merchant accounts prove more valuable, then the money will be spent on programs that merchants value in order to compete over these accounts.

Acquirers already have tiered rates for volume, and I don’t see the lower-volume tiers changing much due to this.

So what this means is that if you have a truly high-volume account, the merchant may be able to negotiate a better rate, but smaller accounts probably won’t be able to. It’s worth noting that I work with customers and recommend credit card payment gateways. I will say that we recommend more higher-priced options than lower-priced options just because the services are better, and usually worth paying for. Furthermore the very high priced options (for high-risk customers) aren’t going to be affected by this….

Chris Travers: They’re just a giveaway to big box stores.

Costco Warehouses don’t accept credit cards (except their own partnership with AmEx). In any event, small businesses seem to be in favor of this law. It seems to me that it’s the big banks, always looking for a way to nickel-and-dime a cushion for themselves to cover speculative losses, that are behind the opposition.

David Welker: If the consequence is known and predictable, it is not an “unintended consequence.” It is a known cost.

I don’t think the consequences are unintended. They’re just a giveaway to big box stores.

David Welker: As for having a debate, what a waste of time. We don’t need to have a debate to know that Todd Zywicki is going to try to carry the water of these financial institutions no matter what. Like he always does. It is so predictable, it is sad.The day that Todd Zywicki says something that is not utterly predictable will be the day that it is worth debating him on anything.

So if there is no point in having a debate, and you won’t even debate TZ because he is a shill for the financial industry, what’s the point of your post? Why not just ignore him?

I really wish the VC would have a more aggressive commenting policy and eliminate personal attack comments like these.

Steven Appelget: We know what Faust got.What did Zywicki get?

And what did you get?

If the consequence is known and predictable, it is not an “unintended consequence.” It is a known cost.

As for having a debate, what a waste of time. We don’t need to have a debate to know that Todd Zywicki is going to try to carry the water of these financial institutions no matter what. Like he always does. It is so predictable, it is sad.

The day that Todd Zywicki says something that is not utterly predictable will be the day that it is worth debating him on anything.

Cornellian: And of course they’d never, ever threaten something they didn’t really believe just in order to try to intimidate Congress into backing off from a measure they didn’t like. And I’m sure someone smart enough to be a VC blogger would never be so gullible as to accept that threat as unquestionable truth.

And of course Dick Durbin wouldn’t lash out at the whipping boy of the moment, threatening them with investigations** and such, when they merely pointed out regulations have unintended consequences!

I’m confident someone with the intelligence of the average Congresscritter would never get economics and fundamental pricing theory so very, very wrong. Surely this letter is a plant by some evil Republican operative… hey, where’d Karl Rove sneak off to?

**From the text of his letter:

If your companies were to coordinate such punitive actions in the same way that you appear to have coordinated your messaging tactics, serious concerns would be raised that you are engaging in an unlawful restraint of trade… Such steps would also raise serious antitrust concerns.

It’s the political equivalent of nice army base… we wouldn’t want anything to happen to it!

Steven Appelget: We know what Faust got.

One moment he wished would last forever?

Cornellian: And of course they’d never, ever threaten something they didn’t really believe just in order to try to intimidate Congress into backing off from a measure they didn’t like. And I’m sure someone smart enough to be a VC blogger would never be so gullible as to accept that threat as unquestionable truth.

Of course, if they don’t set a single rate, the overall discount rates merchants pay aren’t going to go down. This would make acquirers more money, and it would allow small issuers to continue making the same rates.

If I were a small bank, I’d like that arrangement quite a bit.

And of course they’d never, ever threaten something they didn’t really believe just in order to try to intimidate Congress into backing off from a measure they didn’t like. And I’m sure someone smart enough to be a VC blogger would never be so gullible as to accept that threat as unquestionable truth.

Yep, absolutely.

I’m talking mainly about stocks. Through the first part of the last decade, commissions were more or less determined by the so-called Five Percent Rule (NASD IM-2440), which wasn’t a rule so much as a set of guidelines. Everyone understood, though, that 5% was as high as they would let you go without trouble.

As time went on, the rule itself remained unchanged (I understand the proposed revision spent many years going through the SEC process), but the regulators engaged in a lot more of what I like to call back-door regulation, where they just tell you on an ad hoc basis when you’ve gone too high. Not the optimal way of doing things, to say the least, but it worked on the whole in that word would get around the industry and everyone would pretty much recalibrate their thinking to the new ad hoc rules. During this period, I very rarely saw my broker-dealer clients adjust their commission schedules in response to pure market forces; it was almost entirely regulator-driven.

Another thing that happened on an ad hoc basis during this period was the virtual elimination of markups on listed securities. Markups (which are more commonly used for bonds) are just a different way of expressing the commission; instead of paying a commission of 5% which comes out to so many dollars and cents, you pay a markup/markdown of however many cents per share which comes out to so many dollars and cents. The regulators came to believe there was no good reason to express it as a markup, other than in an effort to obscure the true cost, and so on an ad hoc basis they started giving firms trouble for overuse of markups. This may have become a rule at some point but it was enforced by the regulators a long time before it became a rule.

Ultimately the regulators came to a point where they started to frown on the concept of commission-based accounts altogether, presumably because they are too prone to churning and the customer doesn’t realize how hard it is to beat the rake. So firms would get audited and even though the customers were perfectly happy paying the commission schedules, the regulators would give them a hard time for not having more customers in fee-based accounts.

Although I wish there had been a more rule-based approach to give everyone better guidance, I think all of this was pretty much pro-consumer and very little of it would have happened in the absence of strict regulation. About the only “choice” consumers were denied was the ability to pay high per-trade commissions to a savvy broker who researches stocks day and night in order to provide you with awesome picks that other brokers don’t know about. The guy who can do that well enough to justify the high commissions basically doesn’t exist. Anyway, this is all pretty much a 30,000 foot view but I hope the basic point comes across.

Steve: You seem to assume that consumers aren’t already paying the price for the current system. I assure you that they are, unless you think merchants are paying the fees with magical free money that they pick up at the discount window on Fridays. The reason we see the present system as more consumer-friendly is that the costs are largely hidden to the consumer.

Gosh, you think this “hiding” trick might work in other arenas too, like, say, taxes? Withholding vs one annual payment, “employer share” of FICA/Medicare, real estate taxes buried in mortgage payments and rents, corporate taxes built into prices paid by consumers, a small percent on every purchase, a giant percent “hidden” in the price of gasoline, alcohol and cigarettes and the high prices then blamed on the evil corporations, etc, ad nauseum. And now there’s lots of talk about adding the really well-hidden tax, the VAT, on top of all the rest. Maybe we should look at that as being “taxpayer-friendly”, eh?

The Collectives in Russia and China and other Marxist wonderlands do it up right. They claimed to not have any taxes at all. Just reduce the wages paid to their liberated workers to pennies a day, and don’t take any taxes out. See how easy it is to have a gargantuan government without any taxes at all?

The ultimate free lunch.

ShelbyC:
Aren’t cardholders who have become higher risks shifting their costs onto her?

Yes!

I watched the hearing in Congress when Congress was told that if they passed that legislation, the customers who pay their bills on time will have to subsidize deadbeats. Congress ignored them and everyone got charged higher rates and fees. Of course, it is all “evil” bankers and Wall Street” types who are at fault. Not, of course, Congress for failing to listen and take what the credit card issuers were saying into account. This is just more of the same.

I suggest that someone look into who has made recent campaign contributions to Durbin. Or, is this just a shakedown to get campaign contributions from this industry in lieu of regulations?

The people in Congress are too stupid to find their way out of a paper bag, let alone write competent and meaningful regulations. Remember the Georgia Congressman who thought Guam would tip over if we added 20,000 more Marines? No, he was not joking.

Anderson: TZ is always like this — look up the posts he had when the credit card folks rewrote the bankruptcy laws.

does anybody think tz has any credibility after the tripe he wrote about the housing bubble (or as he saw it, the lack of one)?

One is a blogger expressing his opinion, the other is a legislator forcing others to act is accordance with his opinion.

Sounds like they have it sorted out. Obviously a mistake to let the blogger force others to act in accordance with his opinion.

No. People who pay their bills in full every month cost the banks money. If they get “rewards” they cost even more.

If everyone were paying the true cost, Hans’ wife would need to pay a fee.

Dilan Esper: Thanks to Congress, my wife is being forced to pay the actual cost of providing her with a credit card, rather than being able to shift that cost onto other cardholders.

Aren’t cardholders who have become higher risks shifting their costs onto her?

Translation:

Thanks to Congress, my wife is being forced to pay the actual cost of providing her with a credit card, rather than being able to shift that cost onto other cardholders. She is so upset at having to pull her own weight that she has canceled the cards.

[As for the lack of "rewards", I defy anyone to tell me with a straight face that consumers were getting more back in "rewards" than they were paying in increased prices, fees, and interest.]

Hans: some of my wife’s credit cards are starting to charge an annual fee (which leads her to cancel them)

This, I think, is a feature rather than a bug.

Steve: You seem to assume that consumers aren’t already paying the price for the current system. I assure you that they are, unless you think merchants are paying the fees with magical free money that they pick up at the discount window on Fridays. The reason we see the present system as more consumer-friendly is that the costs are largely hidden to the consumer.

I accept credit cards. I am aware of discount fees. I just don’t think that most merchants, particularly smaller ones, will see much of a benefit from lower interchange fees in terms of lower discount rates. Instead the acquirer rate will probably rise to fill in that gap and banks will start treating merchant accounts much better.

Remember interchange rates are wrapped into discount rates. A merchant doesn’t see them. Also remember that a service is worth what someone will pay for it.

Accepting credit cards is generally worth the discount rate and transaction charges. If it wasn’t, you’d see a lot more businesses refusing to accept them. Also remember that if everything tended towards marginal cost, lawyers would take home as much money as day laborers…..

I don’t doubt your expertise, but I don’t quite understand your claim. Given the history of deregulation of brokerage commissions from 1975 onwards, it would seem fairly clear that regulation has not exactly been the driving factor behind substantial declines in commissions (see Schwab, et al), at least for equities. Which regulations are you referring to regarding which fees for which financial products?

The business I’m most familiar with is the retail securities industry. Over the past decade, the typical commission or mark-up charged to a retail investor has declined precipitously, and it is indisputable that the principal reason has been regulation rather than market forces. The free market works pretty perfectly for sophisticated institutional investors (and for this reason, there’s effectively no regulation concerning what those investors can be charged), but when you’re talking about the typical individual investor, even the presence of cheap online brokerages that will process trades for a couple bucks did not have nearly the downward impact on prices as did regulation by the SEC and FINRA.

Some industries have much more transparent pricing than others. It makes a huge difference.