April 6, 2011 | Commentary on Regulation
Don’t look now, but the rewards program for your debit card soon may 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 weeks, 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.
During 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 among the biggest losers.
And it’s not just card rewards programs that are at risk. Debit cards may be harder to get at all — 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 — also is causing banks to increase fees on a wide range of other services, from ATMs to checking accounts to make up their 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. No wonder organizations such as the NAACP have joined industry groups in sounding the alarm on the new rules.
On the other side of the ledger, 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).
At least some retailers already are counting on substantial gains. Home Depot, for instance, is predicting an additional $35 million in profits from the Durbin amendment. But regardless of how the spoils are distributed, consumers will suffer, as the caps interfere with market pricing, increasing inefficiency across the board.
As this consumer train wreck approaches, legislation has been introduced in both houses to stop it. In the Senate, Democrat John Tester of Montana, along with eight other members of both parties, 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, also has introduced a bill calling for a one-year delay.
Congress, however, should go further. Rather than just delay price controls, they should be eliminated entirely.
The problems caused by this ill-considered amendment to last year’s financial regulation bill present a case study in how interference in the marketplace ends up hurting not just businesses but consumers.
James Gattuso is the senior research fellow in regulatory policy at the Heritage Foundation.
First ran on The McClatchy News Wire service