Splitting the difference does not improve bad policy. The final regulations adopted this week by the Federal Reserve Board to impose price caps on “swipe fees” paid by merchants when customers use debit cards to pay for purchases will still hurt consumers.
The Fed did increase the fee cap from the 12-cents-per-transaction cap contained in the draft regulation to between 21 and 24 cents in the final version. Both are far below the current average swipe fee of 44 cents.
The compromise pleased no one. Fed governor Betsey Duke voted against the final regs, saying that they will hurt consumers by eliminating free checking and forcing hikes in other bank fees. Consumer groups mirrored her concerns. Bankers lamented the loss of about 45 percent of their fee income, and merchants were angered that fees will be higher than they expected. They threatened legal action.
Even the Fed governors who voted for the new regs made it clear that they were not happy. Fed chairman Ben Bernanke, who had noted concerns about the draft regs, made the excuse that “this is the best available solution to implement the will of Congress.” And Fed governor Sarah Bloom Raskin said, “We didn’t craft the Durbin Amendment (which required the regs). We are only doing what Congress directed.”
And consumers will end up losing. As The Heritage Foundation pointed out back in March:
Faced with sharply lower profits from debit card use, card issuers are almost certain to react by doing one or more of the following: imposing an annual fee on debit cards; raising other fees that would be paid by consumers; or reducing the interest rates paid on consumer deposits. While such a response would hurt all consumers, it would especially damage those with moderate and lower incomes.
Increased fees on debit cards will discourage some consumers from using them. Instead, they might go back to using credit cards, which typically have higher fees and interest charges. In the wake of the recent recession and legislation that tightened regulatory controls on credit cards, many banks and credit unions have tightened credit standards by lowering credit limits, increasing interest rates and fees for certain cardholders, and refusing to issue cards to certain less profitable customers.
Price caps never work, as four thousand years of experience with them have clearly taught. The final regs still impose a price cap on swipe fees that shifts costs from merchants to consumers. The final Fed swipe fee regs are better for consumers than its draft proposal, but it is still very bad policy.