Entries Tagged as 'consumer protection'

Who’s Afraid of Elizabeth Warren?

August 11th, 2011 at 7:36 am 76 Comments

On July 21st, we marked the one year anniversary of the passage of the Dodd–Frank Wall Street Reform and Consumer Protection Act, the Democratic Congress’ legislative response to the catastrophic financial collapse of 2008.

Dodd-Frank failed to end the Too-Big-To-Fail doctrine.  Quite the opposite. By creating  a new category of “systemically important institutions” Congress has put a gold star on institutions which will always be bailed out.

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Swipe Fee Limits Won’t Help Consumers

April 12th, 2011 at 12:02 am 12 Comments

David Frum is wrong about “swipe” or “interchange” fees. Quite simply, medical the merchants that take payment cards, prescription not the companies that issue them, are the ones looking for a special favor in the form of price controls. Payment card interchange fees produce genuine consumer benefits while capping them will just line merchants’ pockets.  That said, David is certainly right about one thing: interest group politics are enormously important to the way the entire situation came out.

Let’s look at the consumer benefits of swipe fees first. Much of the money banks receive on interchange fees gets funneled back into consumers’ wallets in the form of rewards programs, free checking accounts and the like. In the wake of efforts to regulate these fees, banks such as Chase, JP Morgan and, just yesterday,  Wells Fargo (which operates as Wachovia in some parts of the country), have announced that they will no longer offer rewards on debit card programs. Several banks have also ended free checking accounts. These are real consumer benefits that will be lost if interchange fees are capped.

If capping the fees lowered consumer prices, then, perhaps, it could be argued that things even out for consumers. But they don’t: Australian regulations on interchange fees didn’t impact consumer prices one iota.  This really shouldn’t be surprising. After all, a few pennies off of a roast chicken or a can of soda won’t drive many sales for a retailer while a well-designed rewards program and a free checking account can help a bank build a life-long relationship with a customer.

Moreover, merchants just aren’t, in fact, at payment card issuers’ mercy. Bigger businesses can simply buy industrial banks and issue general-purpose credit cards themselves while just about any business can cut the fees enormously by refusing to process debit cards as credit cards (Wal-Mart does this as a matter of policy; most modern point of sale systems are set up to essentially trick consumers into doing it.) Three of the four major credit card networks, furthermore, allow merchants to pass along the interchange fees directly to consumers. (The fourth, Visa, technically prohibits it but rarely comes down on small businesses that do so.) Such credit card “convenience fees” were once pretty common but vanished when merchants realized that people spend more money when they use cards. At the end of the day, merchants signed onto the payment card networks and benefit enormously from their existence. They are engaging in economic rent seeking by demanding that price controls be placed on the payment card network owners.

All this said, I think that David is right on one important thing: lobbyists and interest group politics played a huge role in the dispute overall. Quite simply, the card issuers and networks were disorganized while the retailers were very well organized.  The credit card networks themselves—the biggest losers if the new restrictions take force—are almost certainly the most economically important firms that have no general purpose, established trade association. (They simply don’t get along; there’s only an ad hoc group created largely to fight the new regulations.) The groups that include the banks and credit unions that issue most cards, in any case, basically hate one another. At least one sizable card issuer that’s also a retailer, Target, actually supported the interchange fee caps. Many financial firms with decent sized credit card businesses were far busier and more worried about other financial reforms last year and got caught flat-footed when the interchange fee regulation debate reared up. Despite spending a fair amount of money, the poorly organized finance firms simply couldn’t match the bigger or better-organized retail industry.

Payment card networks aren’t going to go away if the fees get capped: they’ll still make money for banks. But the caps will simply line retailers pockets’ without bringing any benefits to typical consumers.