The Dodd-Frank financial reform bill, which Congress passed in 2010, contained a number of flaws. Among these was an amendment from Senator Richard Durbin (D-IL) instructing the Federal Reserve to develop new limits on costs and procedures surrounding "interchange," the framework through which debit card companies, merchants, and financial institutions process electronic payment transactions.
Normally, retailers and financial companies negotiate to arrive at a satisfactory interchange fee that will ensure debit-card transactions work properly for their customers. Instead, thanks to shrewd lobbying, the retailers called in federal authorities to cap the amount they'd have to pay for accepting cards. The new strictures propose a maximum of 12 cents per transaction, far less than the 44-cent average for interchange fees in 2009.
Even one of the Dodd-Frank bill’s sponsors, Congressman Barney Frank (D-MA), noted that the interchange rules, "if not properly crafted, may have unintended consequences for consumer choice" and for "Congress’s intent to reduce burdens on community banks, credit unions, and government benefit programs." Frank’s latter reference should particularly worry taxpayers, since making debit cards costlier to use could worsen federal purchasing overhead and endanger efforts to deliver government payments for individuals with less red tape.
Furthermore, debit-card networks have invested considerable resources in creating secure electronic payment processing systems, for which they recover costs by charging market-based fees. Short-circuit that mechanism, and the costs simply surface elsewhere while the networks - along with, eventually, consumers and retailers - suffer. As the Government Accountability Office noted in its study of Australia’s interchange price-control regime, there was little "conclusive evidence" to suggest that any savings for merchants were passed along to consumers. Here at home, card issuers are already planning steps to keep the processing networks solvent. Earlier this year, American Banker reported that Visa would be forced to roll out a two-tiered fee structure for card issuers if the Federal Reserve’s edicts were ratified.
Properly informed consumers should be able to utilize whatever financial products best suit them - whether they are debit cards, checks, short-term loans, or cold, hard cash. But when government rigs outcomes by deliberately rendering one or more of those products less attractive, the negative ripple effect is deep and wide. Policymakers have often expressed concern about the numbers of "unbanked" Americans, many of whom are initiated into the electronic financial system with debit cards. Make those cards undesirable to use, and the deadweight loss of efficiency worsens for an economy that’s already groaning under other government burdens like a complex tax system.
Citizens themselves seem to grasp the high stakes involved with interchange fees; last month Fed Chairman Ben Bernanke told Congress that approximately 11,000 public comments had been logged on the proposal. Many of these opinions could be summed up in two words: slow down.
For all these reasons, it is not only prudent but imperative for Congress to declare a "time-out" on interchange regulations, and Senator Jon Tester (D-MT) has crafted thoughtful legislation that is up to the job. His bill, S. 575, would put a hold on the Fed’s plan and create an expedited process involving four regulatory entities to study the economic and fiscal impact of the interchange rules.
Once implemented, price controls can inflict damage for years. From telecommunications to air travel, consumers have been hurt from the lack of choice, slower innovation, and (ironically) less affordable long-term services that government price manipulation can bring. That’s why Senator Tester’s bill - which could be offered as an amendment today - is so vital. In an economy that moves at the speed of light, policymakers need to be especially wary about hitting "send" on a harsh regulatory message that will do nothing to help a recovery.
Pete Sepp is Executive Vice President of the 362,000-member National Taxpayers Union (ntu.org), a nonpartisan citizen group founded in 1969 to work for lower taxes and limited government.