YES: Banks will drop rewards programs and debit cards. Banking will cost more.
By James Gattuso
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.
NO: The debit card market is broken and needs fixing now.
By James C. Miller III
The U.S. economy is built on a belief that markets should be allowed to function freely. To free marketers like me, this belief is bedrock. Consequently, I view broken or malfunctioning markets, like the current debit payments market, with abhorrence.
Broken markets should have no allies. Their inability to serve consumers efficiently is assured, and the damage they can cause to the economy can be great. An inability or unwillingness to address broken markets is as great a threat to our free market system as unjustified government intervention.
Throughout my career I have stood in the way of efforts to erect barriers to free markets. Without free markets, the entrepreneurial spirit that has made our economy the most successful and resilient in the world would become a paltry shell of what it is today.
Broken markets, on the other hand, stifle innovation, incentivize inefficiency, and ultimately harm consumers and the broader economy.
So what’s wrong with today’s debit card market? Well, lots. Under the current debit payments scheme, networks such as Visa and MasterCard set interchange rates at levels above those needed to entice banks to issue their cards. The interchange fee is paid by the retailer who accepts the debit card, and is then transferred to the bank that issued the card. The fee is hidden from the consumer. Yet, as these fees rise, it is ultimately the consumer who pays in the form of higher prices at the register.
Under this dysfunctional system, the networks’ competitive incentives are to raise fees rather than to reduce them. One network raises its fees higher than the other to encourage banks to issue their cards. Then, soon after, the other network raises its fees for the same reason. The result is rapidly escalating fees, such that according to a survey conducted by the Federal Reserve Board, today merchants on average pay 44 cents for every debit card transaction, despite the fact that the transaction itself costs less than 4 cents.
This broken system would not survive were it not for the fact that Visa and MasterCard represent a combined 90 percent of the debit market. With this market share, new entrants to the market stand little chance of success and thus fail to create the normal competitive forces that would reduce interchange fees. Merchants are powerless to negotiate and can’t take their business elsewhere, so they’re left with no choice but to pay. And pay they do, more than $20 billion last year alone.
Throughout my career, I’ve been a skeptic of government intervention. However, I was neither surprised nor dismayed when Congress stepped in to address the debit card fee problem last year in a way that is clear and justified. Congress told the Federal Reserve to require that interchange fees be reasonable and proportional to the cost of the transaction. Congress also directed the Fed to require networks to give merchants more say in the routing of debit card transactions, a way of injecting competition into the debit card market.
I generally welcome the strong anti-regulatory sentiments that are such a part of today’s political discourse. However, it would be unwise to apply these sentiments indiscriminately and allow broken markets to go unchecked. Congress was wise to step in and address the broken debit card market last year, and now the Federal Reserve must follow through with implementing these reforms.
If either shirks from its responsibilities or gives in to the wishes of the broken debit market’s allies, responsibility for the long-term harm to consumers and the economy will rest on their shoulders.
James C. Miller III, a consultant to the Retail Industry Leaders Association, served as chairman of the Federal Trade Commission under President Ronald Reagan.
