Wednesday, October 26, 2011

B of A's Debit Charges: It's About More Than Fees

The Christian Science Monitor recently discussed Bank of America’s decision to charge fees on its debit cards, ascribing that decision to a reaction to new federal price controls:

In early 2012, Bank of America customers with basic accounts will be charged a $5 monthly fee for shopping with their debit cards. The fee will be charged whether customers choose 'debit' or 'credit' at the point of sale.

ATM usage fees will remain the same, and those customers who do not shop with their debit card will not incur the $5 monthly fee.

Why is Bank of America making this move?

The move is partly prompted by a new federal regulation, starting Oct. 1, that will begin limiting the cut banks can take from merchants at the point of sale. Bank of America is expecting the new lower rate to reduce the revenue that those merchant fees currently bring to the bank. In 2009, those fees amounted to $19 billion in revenue.

So in other words, Bank of America is shifting a part of the fee obligation from merchants to customers.

Sen. Dick Durbin (D) of Illinois responded bluntly to Bank of America's announcement: "After years of raking in excess profits off an unfair and anti-competitive interchange system, Bank of America is trying to find new ways to pad their profits by sticking it to its customers," Senator Durbin said Thursday. "It's overt, unfair and I hope their customers have the final say."

I left some comments. But that triggered an interesting debate with another correspondent, a former restaurant owner. The debate hits upon a crucial distinction that has been lost – the difference between voluntary private agreements and government force; between economic and political power. Here are my comments, followed by the exchange. The other correspondent calls himself The_rabbit_error. For convenience, my comments are italicized and The_rabbit_error's responses are blockquoted. I interjected some additional comments, shown in regular type:

As a B of A customer, I am angry – but not @ B of A. As the article clearly states, the government imposed price controls on banks in regard to fees charged to merchants, and the B of A is merely reacting to it. B of A is acting rationally and morally (and, I might add, legally) in seeking to recoup the lost revenue stolen from them by meddling politicians illegitimately forcing their terms on private voluntary contracts mutually agreed to by banks and merchants. I notice Durban’s temper tantrum. This is classic thug reaction. Politicians love to regulate everything in sight, then blame someone else - usually the victims - when it backfires. Durban can stamp his feet all he wants, but he and his cohorts are the real villains. I don’t like bank fees any more than the next guy. But, on principle, I hope B of A’s new fee sticks, their customers stick with them, and instead direct their displeasure at the politicians that caused it.

Really? I'm sure as hell blaming the banks for charging an unfair fee to merchants. Perhaps you've never had to run a business but the fee they take out of EVERY transaction quickly adds up, and people like you never realize it. I use to run a restaurant, and every thing we severed from drinks to food had to be marked up a good 3-4% to cover our transaction cost. That quickly added up to well over 5$ a month for any one who came in more then 2 times a month. Other restaurants have to do the same. We can't charge a "convenience" fee for people using cards because the banks wont allow it, if we tried we'd lose our card readers.

Put simply, these banks are to damn big and they are able to push small people and groups around. They can nickle and dime us to death, and people like you don't seem to care. Most people never even notice because they hide these cost from consumers and then make us take the blame for their BS. I've had accounts at banks and credit unions, so far I've never seen a credit union need to implement such fees, and they seem to be doing pretty damn good. It just makes it even more damning when these smaller banks and credit unions can pull a significant profit with out these added fees. Clearly the big banks are doing something very wrong. Personally I applaud Senator Durbin, were I in his state he'd have my vote in a heart beat.

I have friends who are in business, so I do know how these fees work. No one forces merchants to accept credit cards. Most do because it on balance is good for sales, and profits. But remember that merchants can pass on those charges to credit card paying customers, OR offer discounts to cash customers – as many gas stations now do in NJ. If a merchant is forbidden by a voluntary contractual agreement to do so, however, then what’s the beef? Drop the contract, lower your prices, and go cash only. One of our favorite restaurants is Spirito’s in Elizabeth. It has been around since 1928, does good business, and has never accepted credit cards. The bottom line is, you can’t have your cake and eat it too. Credit cards are big business because most people find them convenient, merchants get higher sales and fewer bounced checks, and are an overall facilitator of economic activity. Credit cards, fees and all, are widely accepted by merchants because they are on balance a net plus for them. If banks make big profits from their valuable products, good for them – they earned it. But it is simply wrong to get the benefits of a product by forcing your own terms on the provider of that product through political coercion – as the merchant lobby has done in this case.

Wow, you really don't get it. Merchants' DONT have a choice. If I didn't accept cards I wouldn't have had sales (about 80% of our sales were charges of some kind). If I didn't accept cards I wouldn't have enough money to stay open. Which consequently would mean that I couldn't hire people and thus provided jobs. Every other small business in my area faced similar problems, and the end result was our customers paid more then they would have otherwise, because we had to cover our loses. All this law does is force these banks to be up front about what's happening rather then hide it all. Ask most people about merchant fees and they wouldn't know what your talking about.

As for offering cash discounts, it's also not possible for the same reason that adding fees to card transactions isn't possible, I was not contractually not able to. I couldn't get a better contract because when it comes to small bussness they are all "cookie cutter" contracts with no allowances for me to negotiate. The only one's who would have any ability to negotiate for lower fees or the like are large or mega corportations. In the end, even with a decent business and a staff of 50 I still I had no power to negotitate, this law helps level the playing feild so that I can get similar terms that bigger bussness get, and so that people can actually see what's happening. Big banks are making big profits off of MY hard word, and I don't have a choice in the matter. In order to run a successful business I need to accept cards because they have become the defacto standard of transactions. This is a fair and just law, if these banks want to continue to earn heaps of money they can all they have to do is charge the consumer for there valuable service. Only now they have to be in the open about what actually takes place.

Again, all this law does is level the playing field and force the banks to be open about were their money is actually coming from, the consumer. If the banks truly have earned these profits then they can continue to do so by charging the consumer directly rather then trying to pass the buck and hide their tactics.

You’ve made my point quite eloquently, rabbit! Credit cards are a boon to your business and, according to you, others as well. In fact, the "mega corporations" are profiting off of THEIR OWN valuable products, NOT your hard work. It sounds like small business should give silent thanks for the added business. And don’t tell me you don’t have a choice. No one is putting a gun to your head to do business with the card companies. You do so because it is in your own best interest, which I consider to be the essence of moral action. But others have the same right to the same moral action. And this is exactly the point: A voluntary contract is mutually beneficial, and your customers get the convenience of charging their purchases, to boot. It’s a win-win-win. Yet, on the other hand, you find it ok to put a gun to the heads of your own benefactors whose products you readily acknowledge you need "In order to run a successful business"?!? A level playing field is one in which contracts are strictly voluntary agreements. When one side resorts to legalized force to get by political power what he can’t get by voluntary agreement, there is no level playing field. I am strongly pro-free market, and I hold American businessmen in high esteem. But when you seek personal gain by political force, you’ve lost me. American business is cutting its own long-term throat by empowering government to impose private contractual terms – and selling out the rest of the country in the process.

Take note at this point: Considering the regulatory power of government – especially the antitrust laws – diatribes against private citizens by politicians like Durbin can never be dismissed as hot air. Subsequent to his comments, the Democrats began seeking antitrust investigations against B of A. There is no defense against antitrust, making the Durbins of the world more akin to dictators rather than “public servants”. This blatant assault by government officials against B of A over bank fees shows how much today’s politicians believe they can get away with, how much Americans’ reverence for and/or understanding of freedom has eroded, and how far along the path of economic fascism we have traveled, a prelude to a full collapse into dictatorship.

Rabbit flippantly rationalizes that “if these banks want to continue to earn heaps of money they can all they have to do is charge the consumer for there valuable service. Only now they have to be in the open about what actually takes place.” Look where being “in the open” has led – the threat of still more government controls, this time in the name of “the consumer”. While merchants like Rabbit seek to have their cake and eat it too – get the card benefits without paying for it – the government expands and freedom contracts.

Cards have replaced cash. That's not a boon, it's a curse. Fundamentally they are making money off of us not the reverse. If cards didn't exist I would likely have had the same amount of business only with out the over head. Banks want people to replace money with their cards, and they have done so at the expensive of society. People have failed to realize this because these cost are offten hidden, now thanks to this law they can see what it cost them. See this is a point you REPEATEDLY miss, these cost are hidden, all this law does is force them out into the open. Banks are hiding these cost from people and fundamentally cost everyone more because of it.

There is nothing voluntary about this arrangement. If I don't accept cards then I don't have a business anymore, because people have slowly but surly replaced cash with cards because the banks have effectively hid the cost from consumers. I can argue the contracts or get a better one because my business isn't big enough. You completely miss this point again and again. There is no choice here, ether I play by the rules the bank made or I fail. Ask most people on the street you'll find that the majority don't carry cash any more. Hence it's not it's not really possible to operate with out being able to accept it. Remember many places can't offer cash discounts and still accept cards. The end result is that everyone pays more for the same thing, and the bank parasitically takes away the profit. Its a tax that's worse then any the government issues, at least when I get tax some of my money goes back to the community.

Fundamentally the banks have a bigger gun then I could ever have. They have such vast amounts of wealth that they could quite easily crush my business. They've done it to more then enough already. Force comes from many places, and the force of wealth tends to often beat the force of politics. Consider that there must be a damn strong push from people to fix this issue if The banks are still able to charge fees to both parties, they can still make money. No one has taken that away from them. The banks are still making the same amount of money, only now they have
to take it directly from the consumer rather then take it indirectly. The few major banks have an oligopoly over non cash based transactions and they are consequently being regulated. This is all a result of their abused of the system and it seems quite fair and just to me. In the end this will benefit consumers. They will now have a better idea how much their banks are actually costing them, and will hopefully be smart enough to act accordingly.

Translation: "I can't have my way, so I'm entitled to force others!" Those blasted cards are a curse! Notice how the age-old cover for plain thuggery oozes into Rabbit's rhetoric - altruism and collectivism. It’s bad for "Society". Somehow, “society” has no choice. Somehow, the banks “abuse the system”. So, let’s regulate the fees to merchants down. It’s not for the unearned benefit of merchants like me. Oh, no. “In the end this will benefit consumers.”

And restaurant meals have replaced eating home. That’s not a boon, it’s a curse. Fundamentally, they are making money off of people’s need to eat. If restaurants didn’t exist I’d likely have had the same number of meals, and "In the end this will benefit consumers" who would have more money in their pockets and more home cooked meals. Your logic can be repeated ad infinitum, right back to the cave man era.

But in fact, your first sentence says it all. The widespread acceptance of credit and debit cards speaks to the extraordinary value of the product as determined by tens of millions of people, proving it to be one of the most important financial innovations of the 20th century. They facilitate trade, and lesson the risk of carrying large amounts of cash. Such wide use also proves that the fees are very reasonable and fair. Why? Because if they were "excessive", they wouldn’t have achieved such success in the market. What is the "market"? The cumulative voluntary choices of individual participants. Any other method of determining pricing is the method of an armed thug.  

Let’s be clear: force means physical compulsion or violence, or the threat thereof, and nothing else. I know of no instance where someone was forced to use or accept cards. Choosing a course of action based upon competitive necessity or need is not force. The fact that you need to accept credits cards or face lost business does not force you to accept credit cards. You can always choose fewer customers, because you are free to choose. Life is about choices. But if someone demanded a meal at half price or he would break your legs, that would be force; i.e., criminal. The law forcing banks to lower fees to merchants is the same thing, only worse – legalized criminality. All of the banks’ wealth can’t crush your business. Wealth is not force. Only your customers can "crush" your business, by choosing not to patronize it. No bank can stop a customer from entering your business. Only you can by failing to offer competitive value. 

As to those fees, they’re no more hidden than any other business costs such as utility bills, cost of supplies, insurance, building upkeep and taxes, etc. They are also not relevant to the customer, unless you believe that every customer has a right to see your books. The only things relevant to the customer is service, price, and quality. Your resentment against cards is one man’s opinion, and you don’t speak for anyone else. Everyone has free will and the right to exercise it freely without forcible interference from others, including others in their capacity as government officials. Cards add value to the lives of everyone who has one, otherwise they wouldn’t have one, now would they? The banks legitimately and morally earn their fees, however they’re levied, by providing that value. If "Society", the "community", the "consumers", or whatever you want to call it doesn’t bow down to your wishes, you need to deal with it.

You know, I've gone off my original point here so I'm just going to sum it up right now. Banks are business I understand and respect that. However the fact is the larger one's have been hiding most of their cost behind these fees. Merchants have no choice but to raise the cost of their goods to cover these fees (and not accepting cards is not an option in the present day). So while the price of a soda may jump from 1.25 to 1.50, the consumer may not see that the bank has increased the merchant transaction fee and instead declare that it's the restaurant that's being greedy (and I got this complaint a lot). This law forces the banks to be open and honest with their fees, rather then hide behind people like me. BoA can apply fees as they wish, and smarter people will move to better managed banks and credit unions who know they don't have to charge these dumb stingy fees to turn large profits.

With that I'm done, you can ignore my points all you wish from here on out.

I know your point, and I don’t disagree with you – just your methods. But since you widened the discussion considerably, I needed to respond in defense of free markets. I don’t really care how fees are levied, as long as they are based upon voluntary contractual agreement. By the way, I’m no big fan of the banking industry, because it is 70% controlled by the government. No free market there, just bits and pieces here and there – and dwindling all the time.


"Force comes from many places, and the force of wealth tends to often beat the force of politics." This statement by Rabbit, more than any other in this exchange, points to one of the destroyers of both economic and political freedom; the inability to distinguish - or the deliberate blurring of - the line between private and governmental action. Statements such as this, Harry Binswanger writesThe Dollar and the Gun,represents "...a fallacy grounded in the deepest philosophical premises of those who commit it. To defend capitalism effectively, one must be able to recognize and combat this fallacy in whatever form it may appear. The fallacy is equivocation—the equivocation between economic power and political power." The difference between the two, he writes, is between "the ability to produce material values and offer them for sale" - symbolized by the dollar - and the power to impose "fines, imprisonment, and ultimately, death" - symbolized by the gun. Binswanger writes:

Economic power stems from and depends upon the voluntary choices of the buying public. We are the ones who make big businesses big. One grants economic power to a company whenever one buys its products. And the reason one buys is to profit by the purchase: one values the product more than the money it costs—otherwise, one would not buy it. (The savage polemics against the profits of business are demands that the entire gain should go to one side—that “the little guy” should get all of the gain and businesses none, rather than both profiting from the transaction.)

To the extent a business fails at producing things people choose to buy, it is powerless. The mightiest Big Multinational Conglomerate which devoted its power to producing items of no value would achieve no effect other than its own bankruptcy.

Economic power, then, is purely benevolent. It does not include the power to harm people, enslave them, exploit them or “rip them off.” Marx to the contrary notwithstanding, the only means of exploiting someone is by using physical force—i.e., by employing the principle of political power.

Binswanger's essay is an important read, and I highly recommend it. More can be said about Rabbit's comments and his underlying premises. But the key lesson here is: Never accept the premise of equivocation.


Mike Kevitt said...

I got quite a bang outa that guy's typos & misspellings & some of the ways he made points. Got me laughing. At one point he said exactly the opposite of what he was obviously trying to say.

He was programmed decades ago, as a teenager and younger. He's ossified and CANNOT change. (You might think I'm a little the same way, I guess.) I see "legalized criminality" as crime, period, trying to hide under the guise of, and people's perception of, legality. They, and the cops and judges will grant it the legitimacy & respect of law, but the reality of it becomes only a guise when crime is run through it. That's why I say it can be obeyed as practicality and not as morality. More later.

Mike Zemack said...

Yea, I get the feeling he got a little worked up.

I believe many more people read these forums than actually participate. They are the ones my activism is directed at. I don’t set out to change the minds of people like Rabbit. As you imply, that’s probably hopeless in this case. But they offer good opportunities for the spread of rational, pro-freedom ideas – one mind at a time.

Rabbit offered up plenty of openings - more than I had the time or space to cover.