Federal Reserve chairman Ben Bernanke has delivered yet another ominous prediction about Dodd–Frank fallout, telling the Senate Banking Committee last week that government dictates on debit card fees “could result in some smaller banks being less profitable or even failing.”
Although not the first to recognize the problem, the Fed chairman’s remarks certainly strengthen the case for eliminating the ill-conceived “swipe fee” regulations.
The fees (a.k.a. “interchange fees”) refer to bank charges paid by retailers to process debit card transactions. At the urging of some of the nation’s biggest retailers, lawmakers fashioned a provision within the vast new regulatory regime known as Dodd–Frank that requires the central bank to impose new limits on the fees that have averaged about 44 cents per transaction (or 1.14 percent of total purchases).
The Fed’s proposed cap of 12 cents per transaction—a reduction of 72 percent—has provoked an outpouring of comments from the banking sector and other “stakeholders.” And for good reason: the proposed limit translates into a potential loss of $12 billion in bank and credit union revenues.
Financial institutions with less than $10 billion in assets would be exempt from the swipe fee regulation, but many small bankers still foresee problems. Higher swipe fees on their cards, they say, could undermine their competitiveness.
As Bernanke told lawmakers: “There are good reasons to be concerned.… It’s going to affect revenue of small issuers. And it could result in some smaller banks being less profitable or even failing.”
The fee cap, in conjunction with a slew of other new credit card regulations, is also costing consumers in the form of higher fees on other banking services to make up for the lost revenues. As The Heritage Foundation’s James Gattuso reported, major banks such as JP Morgan Chase, SunTrust, and Wells Fargo have announced that they will no longer be offering rewards to some or all customers. And just last week, an analysis released by the Pew Charitable Trusts found that 33 percent more banks were charging annual fees on credit cards this year compared to last.
(Notwithstanding that dramatic finding, the folks at Pew chose instead to headline their finding that median advertised interest rates for bank credit cards remained unchanged while cash advance and penalty interest rates held steady. Of course, those rates are now regulated by the Fed.)
Legislation has been introduced in both the House and Senate to postpone the “swipe fee” rules for a year or two to “study” the regulation. But what’s really needed from Congress is action, not research, on the unnecessary and injurious swipe fee rule. As is the case with so much of the Dodd–Frank monstrosity, the consequences of government interference in the finance sector are worse than the problem they’re intended to remedy.