Steve Rauschenberger is President of the Technology and Manufacturing Association. He previously served in the Illinois Senate.
Federal Newswire:
What does the Technology and Manufacturing Association do?
Steve Rauschenberger:
Throughout the state of Illinois, there are a lot of small and medium-sized manufacturers, and tool and die shops. In fact, people talk about Detroit building the Sherman Tank that won World War II. The parts for that were all made in Illinois, Indiana, and Ohio. Illinois has always been a real big supplier to the auto industry and to other precision manufacturing.
The TMA, the Technology Manufacturing Association, represents small manufacturers, employees of five-100, that don't necessarily always align with the Illinois manufacturers…[Such as] John Deere, Caterpillar, Ford, and very large corporations. We provide service and training, such as for tool and die makers.
It's a great little association that furthers the interest of small and medium-sized manufacturers in Illinois.
Federal Newswire:
What are your members most concerned about?
Steve Rauschenberger:
They're most concerned about not being heard. There's an echo chamber in Washington, DC and a little bit in Springfield, Illinois, the State Capitol in Illinois. The large firms have a big voice, as well as the unions in Illinois in particular.
They're concerned that people understand that 70% of employment in the United States is small and medium-sized businesses. A lot of the critical manufacturing done in the United States is built on a base of real strong, small manufacturers that supply the parts. Caterpillar, John Deere, [etc], they basically assemble things. Parts and pieces are all manufactured down the chain.
It's important for policymakers to understand how important the small manufacturers are and how critical it is for them to understand the impact of their policies. Something that is a great idea for Ford may not work so well in a 200-man tool and die shop.
Federal Newswire:
How will increasing energy and transportation costs affect these smaller manufacturers?
Steve Rauschenberger:
Almost all manufacturing is powered by electricity. They buy electricity, they make compressed air, and they use the compressed air to run their tool and dyeing machines.
Illinois has benefited in the past, because of our nuclear fleet, from relatively low electric rates compared to other states and other countries, but that's all going away. As we close coal plants and we decommission nuclear plants and don't build enough supply, the cost of electricity is rising.
When you're doing production at four o'clock in the afternoon and your utility calls you up and says, "You got to shut down because it's too hot today and we need your power," we're talking about destabilizing some of the strongest manufacturing in the country.
When they talk about moving 20-30% of the transportation fleet onto the electric grid, there's not enough work being done, in my opinion, in either Washington, Springfield, or elsewhere to make sure the grid can support it, and to make sure we can produce that power.
Today, you can't build a coal plant to save your life. Natural gas is not liked by the environmentalists, even though it's a very clean fuel, and most states still prohibit the construction of nuclear stations.
Federal Newswire:
What work have you been conducting on credit issues and finance?
Steve Rauschenberger:
When I got out of the legislature, I did an awful lot of work both in finance, budget, environmental, and regulatory issues. I put together an idea that there are a lot of good associations in Washington, DC that provide a lot of good information to Congress and to the federal regulatory agencies. But they don't do a real good job of repurposing that information for state use.
I made a pitch to several groups that I had met through the National Conference of State Legislatures saying, "Let me be your translator and help you take your public policy to a different level in the states. You do the federal stuff, you've got a great shop out here, let me repurpose for you."
I've done a lot of work over the years with CTIA, the Cellular Telephone California Industry Association, and I now do a lot of work with the Electronic Payments Coalition, which represents processors and banks that receive credit cards. Anything involving a debit or a credit transaction.
I help out if there's a state issue. We do a little support on the federal side
Federal Newswire:
Can you explain the “Durbin-Marshall Credit Card Competition Act”?
Steve Rauschenberger:
First of all, you need to understand that this is an incredibly competitive marketplace. If you have a mailbox, you are getting offers from different card issuers all the time, whether it's Cap One, Chase, [etc]... The banks have built a network of 250 million cardholders across the United States. It's a very desirable network.
Then it's very competitive on the transactional side. There are 10 major networks that compete with MasterCard and Visa, Discover, American Express. Then you have the explosion of FinTech, which is also competing in the space. Then there are over 150 major processors that do the backroom work. It's an incredibly competitive marketplace.
When Dick Durbin comes along and says, "There's not enough competition. We need to put the thumb on the scale and help the retailers cut costs," then you should be suspicious.
Essentially, what the bill he's proposing to do would allow a merchant to decide who processes the transaction and…what train it runs on.
When you have a Visa card, you've got an implicit understanding that Visa's going to process your card, Visa's going to protect your data, Visa's going to stand behind the transaction, they're going to cover you if there's fraud. What the retailers want is a second network on the back of your card so they can select who will process that card.
There's a number of low-cost networks out there that used to do pin debit, older systems. The Chinese actually have a network that operates in the United States.
What Home Depot, Walmart, and Walgreens would like to do is choose how your transaction is processed and who takes responsibility for it, instead of you as the cardholder deciding.
Now, they'll be able to shave a few points off of that, but the exposure to the customer is substantial. The loss of resources to the network that built this system means that there'll be less fraud protection, rewards on those cards, et cetera.
Federal Newswire:
How do these new chips affect the fees that the merchant pays every time you use your card?
Steve Rauschenberger:
It's the revenue that they earn from the swipe fees that allow them to migrate the technology to safer and safer. It led to the chip. Now, it took eight years to help the retail community adapt to the chip card. So now we've got tap cards, which means there's almost no exposure of your number.
The industry's been able to tamp down and reduce fraud. Almost all the fraud today is card-not-present–internet transactions where the seller doesn't see the buyer.
Federal Newswire:
Are credit card companies under pressure from consumers to make sure their data is secure?
Steve Rauschenberger:
Yeah. The federal government's been hacked probably five times in the last six months. Most state governments have been hacked. Universities are hacked, but there's never been a breakthrough into the financial services system. They have absolutely the best data people. One of the card networks told me, on average, they have over 200 assaults on their system each hour.
If you have a breakthrough into the system, you're into the banks. You're not just into Visa or Discover.
Target [had] a major breach. What happened was Target contracted with a heating and ventilating company to manage their thermostats nationwide. They had to let them into their system so they could look at the temperature in Abilene, Kansas or wherever. One of the technicians sold his access code to a hacker. They broke into that system and blew up the cards.
There's all these exposures that are important to secure in the financial services system, so to regulate a competitive marketplace and put the thumb on the scale and reward big-box retailers with lower costs only hurts the system. It doesn't help it.
Federal Newswire:
Are the credit unions and community banks opposed to this?
Steve Rauschenberger:
Yes, absolutely. They earn a small percentage of the transaction because that swipe fee is divided three ways: it goes to the issuing bank who takes the credit risk and pays for the cost of sending the card out, it pays the network that processes it, and it pays the merchant bank, the bank that supports the merchant.
If you're a small credit union trying to stay competitive, you need to offer cards to your customers. Now, sometimes they do that contractually through another big bank or through a processor, but at any rate, they earn a small amount of income from that. They use that income to offset losses in their operation, to provide rewards for their customers, and to provide, in many cases, free checking.
The first Durbin Amendment 12 years ago led to a constriction, almost a 40% reduction in banks that were able to offer free checking, because they lost a major revenue source.
Federal Newswire:
Did the Durbin Amendment help consumers or retailers, or both?
Steve Rauschenberger:
Big-box retailers did very well. If you were a government affairs guy in Walmart, Home Depot, or some other, and you helped pass that first Durbin Amendment, you got quite a stunning bonus because you cut their costs of doing debit transactions. They'd like to do something similar with credit.
Now, we were able to make the argument that there's a difference between a credit transaction and a debit transaction because there's a credit risk for the issuer.
Federal Newswire:
Do they want to regulate banking fees?
Steve Rauschenberger:
Absolutely. The advocates say that none of this happened, that there's still free checking, that the banks are all still there, that nobody collapsed, none of the networks closed–and there's some truth to that, but there's also been a reduction in the expansion of debit.
There's no reason for a bank to encourage debit the way they were in the past. There's less reason for a consumer to use a debit card because there's no debit rewards or debit benefits. There's less free checking. Now, they would claim there's another cost.
[The] Durbin Amendment cut by over 40% the amount that a bank could charge on a swipe fee for a debit transaction.
It was also the end of Red Box. Do you remember the Red Boxes in the convenience stores?
Well, MasterCard, Visa, Discover, and others created special debit rates for those because on a dollar transaction, they couldn't afford to pay full freight. So there were a lot of cases where the networks and the banks made accommodations to make retail work. But as soon as the Durbin Amendment passed, they could no longer offer reductions for some things.
Federal Newswire:
Has this led to people using their credit cards as if they were debit cards?
Steve Rauschenberger:
Yes. If you collapse the revenue stream that the banks and the credit card companies are earning by force majeure–using a federal law to tamp down what they can earn–they've got pressure. They've got to decide how they're going to do it. They're not going to want to reduce cybersecurity or cardholder reimbursement for fraudulent transactions.
So it's very likely… [we will get] what happened in Australia when they decided to regulate the swipe fees for both credit and debit. In Australia, there were virtually no reward cards, no miles, no cash back, and no hotel points, because they took that out of the market.
Now, what people don't realize is there's a real social value to rewards cards. Like any network, the value of a network is its breadth. So in other words, if you've got a telephone, but you're the only phone in town, it's not much good to you because you can't call anybody.
The value of the credit card network is by bringing higher income people into the market, you make it possible for them to market to the lower income. Because if you carve out those of us with discretionary income and encourage us to pay by check or pay in another way, okay, the network is less robust. People talk about this as a bad idea because we're transferring wealth. It's not true.
Federal Newswire:
Despite good intentions, are the outcomes the same?
Steve Rauschenberger:
Right and it's just not in the interest of consumers. There's certainly a reason for big boxes to want to lower their costs. They do it all the time. In fact, the lowest merchant discount rates, lowest swipe fees out there are controlled by Amazon and Costco because they have big volume. They're very competitive and aggressive. They rebid them every two weeks. So it's not like they're getting a bad deal now, but what they'd like to do is pull another four-tenths of a point out of that whole system, and it's just a mistake, a bad public policy to intervene.
These are contracts between competent people. These are banks that have entered into contracts with merchants to help them process their cards.
Federal Newswire:
Consumers still have options, correct?
Steve Rauschenberger:
Number one, they can do cash. They can do cash discounts if they want, but the consumer's not interested. There's also a number of studies that show the cost of managing the cash drawer and the change error exceeds 5%. Some studies show it's almost twice what the cost of the swipe fee is.
There used to be checks, and you used to stand in the grocery line behind that lady writing that check. Well, you pay over 7% in some cases for check guarantees, where you swipe that check and they guarantee it.
There's reasons that the marketplace has migrated. There's a reason McDonald's wants you to use your credit card in the drive-through line. It's twice as fast. There's ticket lift. In other words, I'm no longer constrained by what I have in my pocket. If I want that second Big Mac or I want the latte, whatever. So there's real benefits to the merchant from the credit card transaction.
Federal Newswire:
Is there a better system for merchants?
Steve Rauschenberger:
You ever wonder why the big stores got rid of their own credit cards? They used to have their own. They got rid of them because they were more expensive to manage than using [outside ones].
So you've got external evidence that shows this is a very effective system, cost-effective, costs less than cash, in many cases, costs less than a store charge. So why are we injecting the government, the Federal Reserve, and other people into a system that works?
Federal Newswire:
Why is this legislation to change credit card rules part of legislation affecting the Department of Defense?
Steve Rauschenberger:
Well, they don't have enough votes to pass this on its own. They didn't ever have enough votes to pass the first Durbin Amendment, which damaged, I believe, the debit card system.
They had to stick it inside something else. That's the wrong way.
Federal Newswire:
Would a return to passing bills one at a time instead of all rolled up into a single bill be better?
Steve Rauschenberger:
Yes. We had a single-subject requirement in the Illinois Senate. We could not gang bills up if they did not relate to each other. It's a way to prevent logrolling and bad public policy.
Federal Newswire:
What does the National Conference of State Legislatures do?
Steve Rauschenberger:
One thing I found when I was in the State Senate is states across the country and legislators are handicapped by a lack of high-quality information. Many of them don't even have professional staff…[or] secretaries that answer their phones, but they're asked to make complex decisions about the wireless network, banking, transactions, and the medical system.
Federal Newswire:
How has politics changed since your days in office?
Steve Rauschenberger:
I think American politics has always been rough and tumble. You go back, they called Abraham Lincoln an ape. Jefferson and John Adams were brutal to each other. American politics has always been a contact sport, but it does seem very different to me today than it was when I was in the Senate in the 1990’s.
In the 1990’s in Illinois, the Republicans had the Senate, the Democrats had the House, and the Governor was a down-stater, so nobody trusted anybody. Everybody kept an eye on each other, and we had to compromise every year. It's where we get all blue or all red that I think the complexion changes and it gets more brutal. So I do think it's changed. I'm not sure how bad.
Federal Newswire:
Are the issues more complex?
Steve Rauschenberger:
Yeah. In the '80s and the early '90s there was a term-limit movement. It was, in my opinion, aimed at Congress. But the federal courts said that you couldn't pass state laws to manage Congressional or US Senate terms, so the rifle got turned and it hit the state legislatures. About half the state legislatures now have term limits in one way or another.
If you pick a term limit, what you're going to end up with is 50% of the terms are going to be the average length of service. So if you have a 10-year term limit, it means your average legislator is going to serve five years. He or she spends the first two years finding the bathrooms and figuring out how the system works. Just as they begin to understand, they are term-limited out.
We've got too-short term limits in a lot of states and a lot of legislative turnover, which gives you a citizen legislature. But in these complex public policy times, that just migrates the authority either into the regulatory state, the executive branch, the lobby, or the permanent staff.
So I think that's been a problem, and it's contributed to less expertise on the part of state legislatures. Not all states have gone that direction, but a lot of states have.
Federal Newswire:
You served with President Obama, when he was an Illinois state Senator. What was that like?
Steve Rauschenberger:
I served with him for four years when I was in the majority, and he was in the minority. Then two years when he was in the majority, and I was in the minority. I got to see both sides.
I don't know if you've ever had a friend who was the smartest guy in the room all the time. Some of them develop a lack of appreciation for other people because they think everybody else is kind of dumb. That would be the way I would characterize [President Obama’s] career in the Illinois Senate. He'd fly down there. He'd zoom down and show up on the floor at one o'clock on Tuesday, and by Thursday at noon, you'd see his taillights.
He wasn't big on working with colleagues. He wasn't a very good sponsor.
Federal Newswire:
How do folks find out more about the work you're up to?
Steve Rauschenberger:
The Electronic Payment Coalition's got a robust website. There's lots of information there. If they want to know more about me, Google Steve Rauschenberger. I'm on Wikipedia. Rauschenberger Partners is my little firm with just two of us, but they're there too.
