Archive for June, 2011

Consumers Would Lose if Bank Fees Are Capped

Wednesday, June 8th, 2011

Today’s Record published an Opinion piece that I wrote…To see the online version click here or read the following…

Recently Matthew Shay, President and CEO of the National Retail Federation, cried out that banks nationwide are fleecing retailers’ customers by charging market rate debit interchange fees. Interchange fees are those charged by banks and paid for by the retailer when a consumer uses a debit or credit card. In general, consumers pay the same price when using cash, check or debit/credit cards.  What Mr. Shay is really saying is that he is in favor of government regulating one industry with price controls in order to benefit another, namely retailers…

Mr. Shay further states that any savings that would result from this price control would inure to the benefit of consumers, something that is difficult to believe and was proven ineffective when exactly the same type of legislation and regulation was instituted in Australia. The consumer never saw any savings, and in fact actually saw the cost of their financial services increase. Bottom line, banks increased their other fees, merchants kept the transfer income, and the consumer lost… It is easy to see why retailers are putting on a full court press on this issue.

What Mr. Shay did not care to discuss are the benefits of debit card use, namely that they provide guaranteed payment in contrast to checks which may be returned for insufficient funds, or the fact that the retailers actually can reduce their own losses from employee theft by the handling of cash.


Savings to merchants

There are also savings to merchants in the form of fewer bank transactions, or the counting and handling of cash to be deposited at a bank. Also, what is the value to the merchants of having immediate credit to their accounts for sales made? What incremental effect might the retailers benefit from by consumers being able to spend more than the available cash in their pockets? Would retailers like to give up the internet sales that are now possible because of debit and credit card purchases?

For those merchants who would like to provide a discount to their customers, and avoid interchange fees, why not just offer the discount for cash payment?

Consumers certainly benefit from debit cards as they tend to carry less cash, which of course can be lost or stolen. They can shop online, and therefore make purchases that otherwise might not be contemplated. They often can proceed through the check-out process more quickly, and with less chance of an error. Probably most important, consumers using debit and credit cards are protected from losses as a result of fraud, lost, or stolen cards, the cost of which is borne by the banks and not included in Mr. Shay’s cost of service calculation.

Interchange fees are not a standalone business for the banks… They are part of a relation-oriented product-set that allows consumers to use their finances in an organized, efficient and inexpensive manner.


Free Services

Consumers now enjoy free checking, free internet banking, free debit and credit card services among a host of other products. Upsetting this dynamic will force banks to begin to charge consumers for each of these services and will have the unintended consequence of reducing the amount of spendable income available to consumers, while the retailers will be benefiting from this potentially price controlled system and gorging themselves, aided by government, and paid for by the very consumer they claim to be concerned about.

As for the claim that community banks would be exempt from this price control, it is naïve to think that a system with two separate prices for the same product is sustainable… Economic and competitive forces will always drive business to the lowest cost or price. Why would anyone believe that if a bank over $10 billion in size had their interchange fees capped at 12 cents, that community somehow will be able to charge more? Merchants will certainly find a way to force business to the lower cost provider. 


Reason for concern

Federal Reserve Chairman Bernanke was recently quoted while testifying before the Senate (Senate Banking Committee, May 12, 2011)  stating that he “can’t say with certainty” that the exemption would work, that there are “market forces that work against it” and that there is “good reason to be concerned.”

FDIC Chairman Sheila Bair (Senate Banking Committee, February 17, 2011) recently said “the likelihood of this hurting community banks and requiring them to increase the fees they charge for accounts is much greater than any tiny benefit retail consumers may get for that.”

So what or who should we believe? Mr. Shay and his retailers, who readily admit they need and want the income from interchange fees derived from price fixing, or the laws of competitive economics and the chairs of the FDIC and Federal Reserve?

 My bet is on the latter…

 Please let me know what you think…