Sunday, October 09, 2011

Wal-Mart can't join, tries to beat banks

Published in The Tennessean, Sunday, October 9, 2011

by Richard J. Grant

There’s an old joke about a senator who, when told that his idea won’t work because of “the law of supply and demand,” retorted, “Then we’ll just repeal that law!” As if to remind us that truth is stranger than fiction, Sen. Dick Durbin, D-Ill., was recently shocked to learn that it really was just a joke.

It was Durbin who inserted the amendment into the 2010 Dodd-Frank financial-regulation law that capped the transaction fees that debit-card issuers could charge retailers. He and his colleagues apparently believe that the forced reduction of prices is the same thing as the reduction of costs. He thought he could get something for nothing.

To recoup revenues lost from debit-card interchange fees, many banks have announced increased monthly fees on debit-card accounts. Real costs didn’t shrink. What changed was the pricing structure through which we bear those costs.

The debit-card interchange fees were invisible to consumers, but the new account fees are not. Just as politicians prefer that you not see the taxes that they impose, Sen. Durbin was doubly outraged that the new fees have been dubbed the “Durbin fee.”

When Bank of America announced a $5 per month fee, Durbin lashed out from the Senate floor and urged a boycott.

But while he and his Democratic colleagues cannot be absolved from responsibility for the law, we can still ask what motivated them.

Columnist Timothy Carney asserted that “the real culprit is Wal-Mart and the retail lobby, which used government to squeeze banks and fatten their own bottom line.”

But why stop there? What motivated Wal-Mart? During the past decade, Wal-Mart has tried to reduce its costs by directly offering credit services to its customers.

It has applied at least three times for an industrial loan charter, but each time has been met with intense opposition and lobbying activity from banks and so-called consumer groups.

The banks are rightly terrified by the prospect of competition from a company with the retail expertise and customer base of Wal-Mart. But reliance on government regulation to thwart competition is to take the road to serfdom; and what goes around comes around.

When market relations become fused with politics, then, with apologies to Clausewitz, politics becomes market competition by other means. Legal obstacles limit our choices and channel us into second-best survival strategies. Resources are diverted from the core business into defensive lobbying.

That is how it began for Microsoft, which, until the mid-1990s, tended to stay out of politics. While Microsoft was focused on serving customers, jealous competitors joined with the U.S. Justice Department in attempts to break up Microsoft. Once “blooded” with its first “hunt,” Microsoft learned to lobby with the best, and the worst, of them.

Wal-Mart’s ventures into politics might have begun the same way. But what kind of worldview would encourage Wal-Mart’s endorsement of the “employer mandate” in the recent health-care reform law?

The mandate would increase Wal-Mart’s employee health-care costs, but its competitors would be forced to pay even higher costs per employee. That’s competition by other means.

With determination and a clear assessment of the legal terrain, Wal-Mart can reduce costs by integrating banking functions into its operations.

Although itself “blooded,” it might be Wal-Mart that shows us that banking is not as different from other types of business as once believed.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com .

Twitter: @RichardJGrant1

Copyright © Richard J Grant 2011