Starting October 1, price controls were set by law on debit card swipe fees. Such populist well-intentioned legislation reduces economic freedom and slows economic growth.
There shouldn’t be a law. You can’t legislate the free market. Laws restrict the possibilities of the free market, and free trade always benefits both parties. Economics requires us to look beyond the desire for goods and services at reduced rates. Instead we need to free the markets to innovate and adapt.
Over a year ago in my article “Dodd-Frank Bill Concentrates Financial Power,” I predicted the legislation had “thousands of potential unintended and unanticipated consequences.” I was uncannily predictive when I wrote, “For example, the Federal Reserve will now be authorized to limit the swipe fee that credit card companies charge merchants for debit card transactions. Such price controls have popular support. After all, who wants credit card companies to rake in high fees? But price controls are never good economics.”
Since then legislation has forcibly reduced the allowable fee from an average 44 cents per transaction to 21 cents. Known as the Durbin amendment, this addendum to the Dodd-Frank bill is supposed to spur economic growth by giving retailers lower fees and thus forcing banks to eat higher costs. Dodd, Frank and Durbin share the typical Democrat mindset of believing that redistributing wealth can somehow create it.
Senator Durbin said, “It’s an outrage to make consumers across America pay . . . every time they use their debit cards. And the merchants and retailers who collect it have no voice.”
Somehow being able to access your checking account funds directly with the swipe of a card has become a right whose costs must be subsidized by the financial services companies that built and support them. We do not have a right to free debit card swipes. And government cannot give away such services for free. TANSTAAFL, or “there’s no such thing as a free lunch.”
If Senator Durbin thinks he can make a profit charging only half the fee, he should set up a competing network and rake in the money. If consumers don’t want to pay the fee, they can carry cash. No one is forcing consumers to carry debit cards. But now Congress is obligating banks to set price controls. Banks now must either drop the service entirely or charge the fee to some other service.
Banks do make money on the incremental costs of each transaction. But that’s only after taking into account the massive setup and maintenance costs of building the infrastructure. It’s the same situation when government says it costs pennies to produce a pharmaceutical and ignores the millions it requires to develop it. Making it illegal for banks to set fees where their costs are causes instability in the financial sector.
In an attempt to compensate, Bank of America is adding a monthly $5 fee just to have a debit card. Fees were originally based on a percentage of the amount purchased. Because that method is now illegal, the new fixed monthly cost benefits those who spend a lot at the expense of smaller less affluent consumers. Alternatively, banks may eliminate free checking accounts or raise the minimum required to have an account. None of these changes benefit consumer choice.
I’m not asking you to like Bank of America’s fees. You should vote with your feet and close your account if you no longer benefit from its services. What you shouldn’t do is decide that it is illegal for me to like their fee structure. I should be able to select the mix of fees and services that best serve me without interference from the government. Liberals don’t want Congress legislating in the bedroom. To conservatives what consenting adults do in commerce is just as sacrosanct.
Despite their complaints, merchants have also benefited greatly from the use of debit cards. They are faster, create an electronic record and guarantee payment. Studies show that consumers visit more readily, spend more and tip higher. If merchants don’t like the system, they are free to require a check or cash.
Contrary to populist sentiment, there was no collusion or bank conspiracy. If there were, the government or merchants could have used current antitrust laws. Rather this was just one sector of our free market trying to use government to gain a pricing advantage over another.
The law also exempts banks with assets under $10 billion. Why make it impossible for larger banks to charge enough to cover the costs of their infrastructure and exempt their competition? Why exempt credit unions? Such unfair meddling in a free economy is cronyism at its worst.
This situation has nothing to do with capitalism and everything to do with socialism. It seeks a state-directed and regulated economy serving the supposedly greater good of the nation. Such national socialism with the state seeking to control the economy is correctly called fascism. I use that term technically, not simply to evoke an emotional response.
It does not matter how good the intentions. There is a vast difference between wanting lower fees and legislatively forcing one subset of companies to provide their services below cost. The first is laissez-faire. The second is fascism.
Voluntary trade benefits both parties. The Durbin regulation is an example of coerced trade. Such coercion makes our financial markets less free, which stunts economic growth. Coercion is only required when both parties do not benefit. If they both benefited, they would have cooperated voluntarily. When they both benefit, wealth is created. With coercion, wealth is not created; it is only redistributed. And in that process of redistribution, wealth is inevitably destroyed.
You may think that credit card swipe fees are small and because they are so profitable to the banks, the banks can survive without them. Similar thinking assumed that mortgages were profitable and secure, so banks could afford to make riskier loans. The Community Reinvestment Act required banks to make such loans. We are still paying for that harmless assumption.
Congress caused the financial crisis, which did not justify the bank bailout. That was another travesty of taxpayer money going to help some financial institutions to the detriment of their competitors. Consistent in their meddling, Frank, Dodd and Durbin all voted both to continue the excesses of Fannie Mae and Freddy Mac and then to endorse the bank bailouts. Your outrage should be directed at them.
The unintended consequences of legislative good intentions can do more economic harm than all the self-serving greed within the free trade of capitalism.
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8 Responses
c s gaillard
Your argument may hold water in a ” free ” market selling potatoes , cars etc , but Mastercard and Visa have essential control on debit cards and they can charge whatever the consumer will bear in an oligopoly . All of the merchants were up in arms over this but the individual consumer didn’t have a clue . So just as in the case of utilities , regulation is good to prevent the consumer from being shafted .Witness the fiasco of deregulation in the utility market after much ” expert testimony ” by our most eminent economists such as Alan Greenspan .
David John Marotta
Contrary to populist sentiment, there was no collusion or bank conspiracy. If there were, the government or merchants could have used current antitrust laws. Rather this was just one sector of our free market trying to use government to gain a pricing advantage over another.
Your argument about “essential control” applies just as easily to Google search engine advertising as it does to debit cards. And your comment that “they can charge whatever the consumer will bear” is true of every business. It is the very definition of equilibrium price. Merchants could (and some did) stop taking credit. Others offered a discount for cash, but they discounted cash less than the debit fee and pocketed the difference. They may have thought that difference was fair because a cash transaction took more work, but all that means is that they would be willing to pay that extra fee for the benefits of an electronic transaction.
As for your comments about “fiasco of deregulation in the utility market”, the fiasco part of deregulation efforts fail the worst when legislation tries to free one part of the market and control the corresponding part of the market. There is no faster way to produce higher prices or rolling blackouts. There is no trying to compromise on regulation and still have a free market.
Supply and demand are completely voluntary transactions and bring about the best price-service decisions for consumers. Price controls are *never* good economics.
David John Marotta
Question from a reader: “At the gas station, there’s a sign that says 6 cents less if you pay cash. Why? What stops the banks from continuing to raise benefits like “cash back” higher than their competitors and recovering this by increasing the charge to the merchant? Where does it all end?”
In a sense you’ve answered your own question. What stops the banks from continuing to raise benefits like “cash back” and recover the charge from the merchant is two fold.
First, my credit card offers 2% cash back on every purchase without any gimmicks. They are in essence giving me, the consumer, almost the entire fee. If the vendor marks it up and my credit card company rebates nearly the entire amount, it is almost as though there were no fee. That’s competition.
When a gas station vendor offers $3.40 gas for six cent less if I pay cash, they are marking the product up for those using their credit cards and assuming that they are getting back. They they are offering a similar discount to those paying cash so that they won’t be subsidizing those using credit cards.
For credit cards only willing to pay 1%, the six cents may be worth the inconvenience of cash. For those getting 2%, it is worth 6.8 cents per gallon to continue using their credit card.
So long as my credit card continues to pay 2% I continue to use it rather than getting a 6 cent reduction in the price of gas. I do this because the gasoline vendor is not reducing the price of paying cash by the entire amount that they are saving. They are still trying to make more money off those paying cash than those who are paying by credit card because they really don’t want to handle cash.
Supply and demand will work out how much the convenience of a credit card is worth and how much vendors or credit card companies are willing to compete for the transaction.
In short, the question “What stops…?” is answered by the question, “What stops the consumer from making a different decision about what credit card they use and if they pay cash?” Thousands of consumers making their own free-choice decisions is the free market.
Richard Steven Gregg
This is another of those regulatory questions in the constant ongoing argument between the free or regulated market,, and fair or excessive profits. I frankly don’t know about this one, but in view of B of A’s financial problems it would seem that they are covering themselves for having made poor financial decisions. If real estate and health care are any example, the tendency in the free market is to feed the upward spiral in prices and presume that most can still pay it…..but…it ain’t necesarily so…as the old song goes.
I remember when the Cato Institute was up in arms about rent control and considered it a threat to our civil liberties. My wife and I were renting in San Francisco at the time, and were protected financially by the 4% maximun incrrease allowed a year. The landlord took every opportunity to raise the rent, and is probably enjoying a huge windfall with today’s inflated prices. Bottom line in the capitalistic system: once fairness and integrity go out the window…and greed takes over…you have had it… and this “occupy movement” is a reflection of the disatisfaction many feel with our present system !
David John Marotta
Government rent controls which limit a landlords ability to raise rents in San Francisco to an arbitrary 4% during the 1970s when the government’s action are causing inflation that exceeds 10% seems unfair to the landlord.
Certainly it was good for you. But it was not ‘greedy’ on the part of the landlord. Nor was it ‘fair’ to the landlord.
Would it be greedy for those who invested in Apple to want the full appreciation of Apple’s stock? Would it be ‘fair’ to limit their ‘windfall’ to only a 4% increase each year instead of the meteoric rise that they experienced in the free market?
Or to put in another way. There is no such thing as excessive profits. The Occupy Wall Street idea of “excessive profits” assumes that the money was taken from someone without their consent. That is simply not the case. Every voluntary transaction benefits both parties. Every forced transaction where at least one part would not have done it freely is not fair and does not benefit both parties as much as an alternative would.
If your apple orchard produces well, you experience ‘excessive profits’. You have a great harvest of apples. The fact that you can sell these apples for a lot of money does not impoverish anyone. It is not unfair. Everyone who buys your apples could buy apples elsewhere. Your bountiful harvest is neither greedy nor unfair. It is simply productive. And society has no right to tell someone that they are excessively productive.
Richard Steven Gregg
Thanks for your reply David, but it’s the same old thing: when you are on the receiving end everything is just fine Jack, and when you are on the paying end it’s just too bad Charlie ! It’s a matter of fairness and preserving our way of life. If many are suffering and the few are benefiting it is not a healthy situation. Thinking back to Marie Antoinette who said “let them eat cake”…well, she got her head chopped off and the country sank into revolution. I definitely don’t want to see that happen here…!!
David John Marotta
Your reply is a little too vague. If people are receiving from the free market in a voluntary exchange or paying for goods or services: That is fair and preserves our way of life: freedom.
Your assumption seems to be that many are suffering because of something immoral or that a few are benefiting because of something immoral. Only government has that kind of power. It just doesn’t exist in a free market where “Every voluntary transaction benefits both parties.”
Please remember that the financial situation in Marie Antoinette’s France was a result of exhorbidant costs of the royal retinue threatening backrupcy and the unwillingness of Parlement to raise taxes to pay for it. When Parlement was exiled and the king tried to force the unpopluar May Edits legislation through anyway that started the Revolution.
In all of this, Marie Antoinette represents bloated government.
Richard Steven Gregg
Thanks again David, my history comparison may not have been the best, but was just intended to show the extremes that can sometimes happen. My concern is treating ordinary workers good enough that feel like going to work, being productive citizens, staying out of trouble, raising good children, contributing to their community etc. If you are barely surviving financially, life is no fun, and you can hardly be expected to be a model citizen. Maybe that’s what those “occupy now people” are all about….they are the ones not being rewarded…at all. In naval terms, we all either float or sink together….and…an anchor chain is only as strong as it’s weakest link !