March 31, 2011

March 31, 2011 | Commentary on Regulation

A Swipe At Consumers

Don’t look now, but the rewards program for your debit card may soon disappear.

Thanks to a new regulation out of Washington, banks across the country are limiting or ending the benefits they offer to cardholders. In the past week alone, JP Morgan Chase, SunTrust and Wells Fargo have announced that they will no longer be offering rewards to some or all customers.

More are expected to follow suit.

The cause of this turmoil is a little-known provision tucked into last year’s Dodd-Frank financial regulation bill. Sponsored by Sen. Dick Durbin, D-Ill., the provision requires the Federal Reserve to limit the fees banks can charge retailers for processing debit-card transactions.

These fees known as “interchange” or “swipe” fees vary widely, but average about 44 cents per transaction, or 1.14 percent of total purchases. Overall, the fees generate about $14 billion for the banks that issue debit cards.

Over the past several years, as debit cards have become more popular with consumers, retailers have loudly complained about the cost of these fees. Durbin’s amendment was an attempt to address these complaints.

Specifically, the Federal Reserve is charged with setting limits on these fees to ensure they are “reasonable” and proportionate to cost. After a hasty review of the marketplace, the Fed proposed capping interchange fees at a flat 12 cents per transaction, barely one-fourth the current rate.

Initially, this cap on interchange fees may have been seen as an easy way to score political points. In the wake of the 2008 bailouts, big banks have been political lepers, so why not transfer a few bucks from them to help out local retailers? But now it looks like consumers will be losers.

And it’s not just card rewards programs that are at risk. Debit cards may be harder to get, depriving consumers of one of one of the most beneficial personal finance innovations in recent years. The fee cap along with other new banking regulation is also causing banks to increase fees on other services, from ATMs to checking accounts, to make up lost revenue.

The net effect will not only be to make banking more expensive, but cause many lower-income Americans to drop their bank accounts entirely. Jamie Dimon, CEO of JPMorgan Chase, projects that as many as 5 percent of consumers to discontinue their accounts, becoming “unbanked.” No wonder organizations such as the NAACP have joined industry groups in sounding the alarm.

It’s not clear how much retail consumers will save, if anything. Merchants won’t be required to pass on their windfall to customers (nor should they be, unless we want price controls at the retail level as well).

Legislation has been introduced to stop it. In the Senate, Democrat John Tester of Montana introduced a bill calling for a two-year delay of the rules while their impact is reassessed. Rep. Shelley Capito, a Democrat from West Virginia, has proposed a one-year delay. But rather than just delay price controls, they should be eliminated.

The problems present a case study in how interference in the marketplace ends up hurting not just businesses but consumers. Unfortunately, it is only one of countless questionable provisions in the 1,600-page Dodd-Frank Act. Policymakers may be busy for years to come cleaning up the mess.

James Gattuso is the senior research fellow in regulatory policy at The Heritage Foundation.

About the Author

James L. Gattuso Senior Research Fellow in Regulatory Policy
Thomas A. Roe Institute for Economic Policy Studies

First appeared in The Savannah Morning News