Debit Card Debacle Must Be Cleaned Up

Another Day, another mess to fix from the 111^th Congress.  

I’ve been posting on this issue for a few days now. The new Federal Reserve Bank rule to cap prices on what banks may charge merchants each time they swipe a transaction will take effect in April unless the new Congress steps in to push this off and study the effect it will have on the market.  In my opinion, and in the opinion of other banking industry experts, this new rule will threaten the flow of credit to low-income Americans and promises higher fees on all bank services for nearly everyone else.  As I’ve said in earlier posts, it’s the consumer whom Congress purports to help, but who gets it in the neck in the end. The financial reform mess called Dodd-Frank has a provision inside that is basically a hit to giant retailers, while whacking the banks yet again.

As reported in WSJ, CNBC and others, under current rules, every time a customer uses a debit card in a store, the issuing bank charges the merchant a small transaction fee, which represents a percentage of the sale. Under the new Fed rule, which will take effect in April unless Congress acts to stop it that fee will be capped at 12 cents per transaction, reducing the charges by some $12 billion to $14 billion and in effect transferring the cost of debit cards from the merchants who pay the fees to the consumers who use them.

Naturally the merchants applaud this because it reduces their costs by as much as $ 14 billion, and they “promise” to reduce prices accordingly. Don’t hold your breathe because price reductions will never happen. The merchants’ windfall will be recouped by the banks who will simply increase checking account fees, charging for debit card usage if they can, or simply requiring maximum debit card transaction amounts like the $ 50-$100 limit being discussed at Bank of America. I've met with Chase bankers and they have told me that the bank is considering maximum debit card transaction limits, and they have already eliminated free checking tied to the quantity of debit card transactions.

Congress’s meddling in the financial markets has proven to be a bad thing to consumers. Just look at the 2009 effort to regulate credit cards.  Price controls set in that effort have lead to denial of credit to marginal borrowers, cutting of credit limits without warning, cancellation of entire lines of credit and more.  Many of these sub-prime borrowers have been forced into the arms of payday lenders (some of the most expensive loans known to man).

Write on a chalk board 1,000 times: Price controls on credit lead to . . . less credit.