The Disingenuous Mr. Russell Simmons

Russell Simmons (yes, the hip-hop entrepreneur and vegan advocate) is blogging away at Huffington Post against the Durbin interchange amendment.  Simmons claims that his card takes "the poor, the voiceless and the under-served" out "from the claws of payday lenders and check cashers, from humiliating lines waiting to cash their paychecks and then more lines to pay their bills." 

Gosh, you'd think that Russell Simmons was operating a charity. Somehow Simmons neglects to mention how much money he is pocketing from debit card swipe fees in addition to the $1/transaction "convenience fee" the RushCard charges its low-to-moderate income users.  (See here for more details on the RushCard.)  The RushCard is an alternative to check-cashing outlets, but that's all that it is--another high-cost financial service for the poor.  I'd be curious to know how much revenue the RushCard makes on interchange; I suspect it would still be quite profitable without it.  Maybe Russell will show us the books.

Russell Simmons is claiming to be the voice of minority communities and the poor on interchange.  He's not, and his personal financial interest in maintaining high interchange rates compromises him as an advocate on interchange, just as the fees on the RushCard compromise him as an advocate for the poor. 

It's worthwhile looking at what The Hispanic Institute, which has no financial stake in the matter, found in an empirical study it sponsored on interchange fees.  The study finds that there is a regressive cross-subsidy that has a disproportionate negative impact on low income minority communities.  

Simmons also misunderstands (perhaps deliberately) the Durbin amendment in his post; he complains that it regulates debit interchange while leaving credit interchange untouched, and that this dings the poor, while leaving the rich unscathed.  That's just wrong.   While part of the amendment deals only with debit cards, part covers all payment instruments, including permitting merchants to offer a discount for debit (how does that hurt the poor?).  The impact of reduced debit card interchange will inevitably be reduced credit card interchange rates for smaller ticket transactions where credit competes with debit. 

The logic of the Durbin amendment is straightforward:  debit transactions are just like checks, but with even lower fraud risk because of real-time authorization.  Checks clear at par throughout the entire banking system.  Therefore, debit should clear at par too (or close to it--the amendment is generous in this regard).  If debit clears at near par, credit interchange rates will drop, and because merchants are, in general, more price competitive than card issuers, the savings will be largely passed through to consumers.  The card industry will have to learn to live with reduced (but still substantial profits), which should incentivize the card industry to innovate to develop new, efficiencies or higher margin products.  Net result:  consumers win.

Comments

[MWStory]

Simmons uses his association with hip hop to overcharge the innumerate in his own community, and implies racist motives are behind any scrutiny of his activities. For a so called community leader to profit first from exploiting African-American culture by promoting misogynistic consumerism and selling black stereotypes to the suburbs, and then use the fame that brought him to encourage trusting, uneducated people to overspend on their branded rush cards is despicable.

It seems to be a family trait, as his brother (the 'reverend' Run) is involved with the thoroughly unpleasant Bishop Jordan (http://www.bishopjordan.com/).
'Bishop' Jordan's act involves blinding the foolish with vulgar displays of material wealth then promising that in return for donations or 'seeds', God will deposit cheques with donors or make other wishes come true. They cite their own wealth as proof that God is blessing their activities, and it seems that none of the fools that sit in their churches make a link between handing over their cash and the sudden wealth of their self ordained clergy.

Big Man behaviour at its worst

[Factchecker]

Perhaps he is disingenuous but the merchants can be the same , the idea that credit card interchange is regressive is a bit flawed at times because credit card companies make business decisions and its more rhetoric than reality.

In order for credit card to be truly regressive, merchants would have to pass on discounts to the consumer, they are allowed to do so if they advertise it, but the NRF doesn't want that, instead they want to be allowed to use bait and switch tactics such as last minute denial of certain credit cards and surcharges.

The other issue is the fact the credit card rewards are not what makes anything regressive, its capitalism and decisions by the consumer, say a consumer wants an 18 month 0% apr credit card with no rewards, the credit card company by offering a 15 percent interest card with rewards can subsidize and offer both cards. Many hispanics and low income folks are hard to categorize, some may shop at cash only places and not even pay taxes on their income, a lot of low-income folks use rewards cards with high interest rates. In fact many card companies offer and promote credit cards to students which spurred a crackdown to congress, given that students are not as high income as a image of a wealthy household getting discounts at the expense of the poor who pays cash is wrong and misleading.

Debit is not a check, a check takes time to clear, the merchant is liable for hot checks and fraud and there is a float time, a proper distinction could be pin v. signature and a clearer understanding of the costs and differences. The bait and switch durbin proposal would allow merchants to give discounts without them having to clearly label it. Their complaints are unfounded because all a store has to do is say 3% discount for cash, a few businesses do so but many businesses particularly the large retail industries don't want that because they know certain segments of the consumers would not spend beyond their means or they don't want to promote inefficient cash if they don't want to at the time such as in the case of theft or accounting or tax compliance. They may also not feel at certain times as to what discount they want to give so as to avoid contractual obligations at their own whim and fancy.

Wealthy folks by the way have more cash in the bank so debit interchange reform wouldn't help low income consumers who may not pass on savings to the consumer anyways. A wealthy more educated family is more likely to pay the balance in full as opposed to a lower income folk who may be more willing to take an interest or loan.

[Adam Levitin]

Factchecker--there's a lot of very confused stuff in your comment. Let's see what I can clear up:

Yes, merchants have a right to discount for cash. (Don't forget that the card networks fought against this in 1981.) But it is meaningless because of the way the card networks interpret it. Crd network rules require that merchants list the cash and credit price on each individual item if they want to do this. That means grocery stores would have to put two price labels on each Slim Jim. The result is to frustrate the ability to discount for cash except at places like gas stations that sell only three items (regular, premium and ultra). Do you really think that Wal-Mart isn't going to pass on the savings to consumers? Really?

There are also features of cards like 0% teasers that involve subsidies that might not be regressive. But those subsidies differ from the interchange one because they are the product of card issuers' business decisions. The interchange cross-subsidy is not the product of merchants' business decisions. Instead, it is imposed by the network on the merchants.

Nothing in your comment explains why permitting merchants to offer discounts for debit or particular credit card brands would be a bad thing. If your concern is really that there'll be bait-and-switch, I've got four responses for you. First, the Durbin amendment would not permit either of the bait-and-switch tactics you outlined. It does not permit discrimination by card issuer, and it does not permit surcharging. Second, there are competitive forces that limit unscrupulous merchant behavior; I have trouble imagining a Best Buy or a Whole Foods doing this. A merchant that will bait-and-switch on cards will also be screwing its customers in other ways, and that's a hard business to keep going. Third, can you point to any evidence of widespread bait-and-switch in countries where merchants can surcharge? And fourth, if you're still worried about bait-and-switch abuses, that's not a reason to oppose the Durbin amendment; it's a reason to work to improve it. If bait-and-switch ends up being a problem, you'll hear me as one of the first calling for reform to prevent it.

[Factchecker]

I don't see how labeling different prices is a bad thing, a store does not have to label each item differently, they can post a sign saying 3% cash discount for each item, many stores including computer merchants have done this, what the durbin amendment does is remove the penalty in which someone goes up to buy something and then is surprised by a discount for cash not advertised, who knows the merchant could say 3% one hour and then 2% the next hour.

I read an new york times article about this debate in the 1980s, however the full article is not available for free. One person did comment that the truth in lending act should or mean to require that two prices be advertised. Senator Dodd did have a proposal to have companies surcharge 5 percent or give 5 percent cash discount, it do go through american express and its discount policy in which prices had to be clearly labeled.

The bait and switch occurs in which certain customers get it and some don't since it is not clearly advertised. Retailers know this. The Durbin amendment prevents the card network from penalizing the card network for abuses by the merchant. Whether state laws such as in New York and other states will prevent merchants from doing this , I am not certain.

Small businesses are probably more likely than big ones to do this, since large corporations are more prominent and have a higher profile and auditing and those are the onse who like credit cards. In fact retailers them selves issue store branded visa and master cards, because they know consumers are likely to spend a bit beyond their means. Australia has a lot of bait and switching , 10% surcharges from a taxi company and qantas come to mind. Denmark charges 5% for use amex as a photo occurs.

Companies may or may not pass on the savings, but they don't want a bill requiring them too, likewise raising interchange rates will not likely improve rewards to the consumer or 0% apr offers, its business on the free market.

Using plastic also has benefits for the retailer and the consumer, let's suppose you have a dispute with an online merchant, the item has not arrived or arrived damage or delivered to the wrong address, the consumer if he/she can't resolve it with the merchant can file a chargeback.
With debit, check, cash its not possible.

I do somewhat symphatrize with minimum payments displayed in stores, but have often asked why wouldn't the card networks want small item businsses, many cafe's only take cash only because a $2-4 latte would cost .50 c to process or an interchange rate of 10-25%, much than 3%, if visa and mastercard want their business they would so something, are they contracted with networks to make it difficult to do this or perhaps they just want the business of larger retailers, again a free market.

Retailers also want to cherry pick which certain cards they use aka rewards cards even though a rewards cards user may be paying a higher interest rate and subsidizing a 0% apr low income less interchange rate credit card, or a person who spent beyond their means and has fair but not excellent credit is able to get a 0% offer but only because a heavy volume rewards credit card user is subsidizing him.

Should we then regulate and say that all credit cards should have the same interest rate with no rewards? Are let's say a consumer bought an exotic loan and now has bad credit, or made a bad bet on the real estate boom. Is it fair for a responsible borrower to subsidize and only get the same credit card as him.

A lot of federal reserve folks have said this issue is very difficult to resolve and complex to benefit the consumer.

[Geoff]

"Do you really think that Wal-Mart isn't going to pass on the savings to consumers? Really?"

Yes. Really.

At best, I would expect Wal-Mart or other merchants to take their savings from interchange reform as an additional margin to allow (minimally) lower sale prices. Anyone who suggests that interchange reform is going to result in an across-the-board price cut is crazy. Ultimately, this debate is about which set of companies (merchants or banks) gets to keep the interchange revenue. You can make a fairly compelling case for either side, as your inclination runs, but let's not pretend this issue has anything to do with protecting consumers.