Consumers widely accept the fact that to use a service, we are charged a fee. Whether paying the phone company to connect with friends and family, a dry cleaner to starch a shirt or a mechanic to change your oil, it’s a fundamental tenet of our economy to pay a fair price for services rendered (or to be able to shop around until we find one). So it is with debit cards – merchants who don’t want to bear the costs of participating in a secure card-payment network need not accept those cards.
However, retailers like Wal-Mart and Home Depot didn’t see it that way. Rather than respect the outcome of negotiations they entered into with financial companies for their customers to access debit card services, last year they launched a multi-million-dollar lobbying push to limit how much they would have to pay. Unfortunately, their efforts to undermine the free market were successful. Retailers got their gift of government price controls on debit-card merchant fees from a compliant Congress as part of the flawed Dodd-Frank banking legislation. Asking federal regulators to disadvantage others when you don’t get your own way is something the late Nobel Prize-winning economist Milton Friedman called a “suicidal instinct” among American businesses. That’s because once it intrudes into the marketplace, the heavy hand of government becomes indiscriminate and eventually exerts a stifling grip on everyone.
So what do Americans gain from these new rules? As with many micro-managing regulations these days, precious little. Despite their assurances to the press and politicians who helped them, retailers need not pass along the savings they lobbied for in Washington to consumers back home. As a result, we’re not likely to pay less for groceries, clothing or household goods. In its examination of Australia, where retailers won caps on the amounts they paid to access debit transaction networks a few years ago, Congress’s own Government Accountability Office was hard-pressed to find any “conclusive evidence” in favor of lower prices on products.
Even so, it does mean that we may see the end of programs like free checking, rewards programs and other incentives your bank offered to enhance the value of a debit card transaction. If you keep your money at a smaller, community bank, the results could be even worse. Karen Thomas of the Independent Community Bankers Association said that the Fed’s proposal “will unquestionably lead to more consumer fees, fewer product choices and greater consumer confusion regarding card acceptance.”
Another disturbing aspect of the new interchange rules is the danger it poses to the safety of your money. As the Competitive Enterprise Institute’s John Berlau noted, the Fed has acknowledged its price controls are set so low that debit card companies may not be able to recover some costs of running their systems, such as labor overhead for providing customer service. Moreover, card issuers will have fewer resources to invest in anti-hacking and other technologies to protect the security of their systems. Not to worry, defenders of the new regulations say, because merchants will be able to choose from a wider range of cheaper but perhaps less-proven networks. Will consumers be made sufficiently aware of this fact, and the possible threats to the confidentiality of transactions?
Instead of piling on more onerous rules to “fix” the ones they just recently enacted, lawmakers should start over in the 112th Congress by repealing the interchange price-control provisions in the Dodd-Frank law (along with revisiting several of its other aspects). Just as “zero liability protection” gives consumers peace of mind while using debit cards, elected officials should avoid imposing liabilities on one sector of our economy to politically benefit another.
Pete Sepp is the executive vice president of the National Taxpayers Union.