I’ve posted about this before (here and here for example) but we now have more information about how the Fed-proposed price controls will hurt consumers and merchants alike. The bottom line: Some consumers are likely to find that some of the services they have come to rely on from their financial institutions – like free checking – will no longer be available to them. Other, unrelated services will cost them more.
The situation is both unfortunate and unnecessary. On December 16, the Federal Reserve proposed a rule to cap the interchange fee at between $0.07 and $0.12 per transaction. Not only will this proposal reduce what institutions now charge by an average of 84 percent, it will force financial institutions to process transactions well below the cost of providing them.
The result of this price-fixing rule is certainly predictable: Like any business, financial institutions either will be forced to stop providing these services or will have to look to new fees on other products and services to cover the expenses. Annual fees, limits on the number of debit card transactions, and limits on the amount of a debit card purchase are all possible.
This is not just theory. According to the U.S. Government Accountability Office, Australian consumers received fewer benefits and paid more for their cards when that country capped interchange fees.
The Fed’s proposal does not take into account funding costs, overdraft losses, billing and collection, customer service, data processing, protection of customer data or fraud losses that relate to supporting debit services. It also didn’t take into account the investment and development costs borne by financial institutions to create the electronic payment networks consumers and merchants have come to expect and use with increasing frequency.
It’s hard to understand the Fed’s rationale for this price fixing, but it is easy to understand its consequences. Low and moderate-income consumers will be disproportionately hurt from increasing fees. According to a recent article in the Wall Street Journal by Professor Todd Zywicki of George Mason University, “Many low-income Americans will be unable to qualify for free checking under the new fee regime, meaning they will have to pay higher fees or drop out of the banking system to payday lenders and loan sharks.”
In addition, consumers won’t necessarily benefit from lower prices at the store. According to GAO, “Many industry participants acknowledged that it would be difficult to prove a direct link between lower interchange fees and lower consumer prices.”
On top of everything else, the Fed itself clearly had doubts about the impact of the proposed rule when it requested public comment on its proposal on December 16. For example, at that meeting Fed Governor Daniel Tarullo said, “(The proposal) suggests to me that we should be more open than usual to a variety of comments.” Governor Kevin Warsh said, “…we should be particularly keen to listen to comments and people’s perspectives. I would be particularly interested in comments on whether there is a more viable, pro-competitive alternative to setting prices.” And Vice Chair Janet Yellen, one of the most consumer-friendly members of the Fed said, “We will be interested in reviewing commenters’ input on the proposal as we determine what refinements should be made when it is adopted as a final rule.”
If several of the Fed’s own governors have doubts and questions about what it was proposing on interchange fees, it’s safe to say that the proposal needs to be seriously scrutinized, reviewed thoroughly, and revised substantially.