News Analysis

Jamie Dimon stumbles in war of words with US senator over interchange fees

By Peter Hoflich

The J.P. Morgan CEO used his annual letter to shareholders to take a shot at politicians setting the reform agenda; this is a game he is not likely to win.

On April 7th, J.P. Morgan released its 2010 annual report, and with it CEO Jamie Dimon’s 32-page letter to shareholders. The piece has been roundly hailed by investors, such as Tom Brown, who enjoyed it for its honest discussion of mistakes made, an assessment of the Washington Mutual integration, reflections on capital standards and resolution mechanisms for failed institutions, and his take on the shadow banking industry. Among the discussions is one about the Durbin Amendment and its repeal of certain debit interchange fees—on page 25 of the report—which Dimon describes as “policy that has little basis in fact or analysis.” Durbin, of course, takes umbrage, and has produced a letter of his own to rebut Dimon’s accusations, using both strong and weak arguments, but also a fair sprinkling of populist language. Dimon has clearly stirred a hornet’s nest: Durbin is the second-most powerful democrat in the US senate and is not up for re-election until 2015.

Durbin is clearly furious, coming with rebuttals to five of Dimon’s points, the first one being a claim that Durbin’s amendment was passed without “fact-finding, analysis or debate”. That’s like saying that the good senator didn’t do his homework, which seems hard to believe, and to which he mentions “years of Congressional hearings, Government Accountability Office reports, academic articles, and published studies by the Federal Reserve’s economists and payment system experts” that were considered in crafting the amendment. He also displays a great deal of knowledge about the inner workings of Visa and MasterCard, describing a fee regime that is generous, growing, and that doesn’t offer a competitive element that will allow the development of better services at lower rates. Durbin describes a controlling body that establishes prices and has produced the highest debit interchange rates in the world. Not what you’d expect from a well-developed capitalist economy like that of the US, with Durbin noting that “The Federal Reserve has also found that the high interchange rates charged today far exceed what it actually costs to conduct a debit transaction.”

There is disagreement over what constitutes price fixing: Dimon feels that the new rules fix prices artificially low, while Durbin feels that Visa and MasterCard have been allowed to fix prices on banks’ behalf through lack of regulation. “Visa and MasterCard cannot simply be trusted to fix interchange prices in a way that is fair for all participants in the debit card system,” Durbin writes. Hard accusations.

Durbin clearly has a great deal of anger towards banks, built up over years of financial crisis, and some of this may or may not have anything to do with interchange fees. “Your industry is used to getting its way with many members of Congress and with your regulators,” and “you and your bank are already making money hand over fist.” Banks have not all been getting their way, and there’s nothing in the Business 101 textbook that says businesses that are profitable overall should stay in an unprofitable business, and if debit becomes an unprofitable business for banks, as Dimon hints, there’s no reason why they don’t leave it, as some already appear to be doing. Durbin refers to articles that US banks are earning record amounts from fees to consumers, but doesn’t note whether these are fees for debit cards (they may not be). 

He also falls into another trap of comparing apples and oranges: while J.P. Morgan in the US promotes signature as an anti-fraud method (which is the expensive, fee-earning option for merchants to take up, according to his letter), Durbin notes that J.P. Morgan in Canada encourages chip and pin, a cheaper and more secure method. Sounds compelling, but this is due to a different regulatory environment in Canada, where EMV chip card acceptance has been mandated at all merchant terminals by March 31st, 2011 to allow for a liability shift. The US is well-known to be a holdout market for expensive EMV conversion (where banks need to issue new chip cards and merchants need to invest in new terminals to read the chip cards), and US banks have simply not been mandated to switch. I’m not sure what the point is that Durbin is really trying to make, since he’s referring to a technology that is not widespread in the US but is being implemented in a different country. Maybe he doesn’t have all of the facts after all, or maybe he knows but is just taking a cheap shot to win points.

Despite some flaws in his argument, Durbin does demonstrate that he’s done his homework, and this is already enough to give him this round. He also has the last word on the matter, at least until Dimon decides to raise the matter again, at which point he will risk entering the space where people will think he doth protest too much. But Dimon is the head of a large, very profitable bank, and as such he is in a position where he can easily go back to business as usual. Many of his competitors cannot say as much.

Categories: Consumer Credit, Regulation, Retail Banking, Risk and Regulation
Keywords: Interchange Fees, Visa, MasterCard
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